Macerich Co (MAC) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

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

(Operator Instructions).

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, ma'am.

Good morning.

Thank you all for joining us today on our third-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 release and SEC filing.

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; 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.

Thanks, Jean.

Just a reminder, everyone, on Monday, November 17 we will be hosting an investor dinner in Santa Monica and that will be followed by an Investor Day on November 18.

We encourage all of you to attend if possible.

Consistent with past practice on these calls we are going to be limiting the call to one hour.

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

It was another strong quarter.

In general we continue to see strong operating results.

Leasing spreads were good again for the quarter.

We signed 184,000 square feet of leases, 10,000 square feet and below average releasing spreads 20% -- that's trailing 12 months.

Mall occupancy was at 95.6%, up 190 basis points compared to the portfolio at September 30 of 2013.

If you look at the same center occupancy, excluding dispositions the occupancy gain was up 130 basis points at 95.6% compared to 94.3% at September 30 of 2013.

Average base rents increased to $49.27, up about 4.6% from a year ago.

For the quarter FFO was $0.88 compared to $0.86 for the quarter ended September 30 of 2013.

That was within our guidance range of $0.875 to $0.90 per share for the quarter.

Same center NOI came in at 3.93% compared to the third quarter of last year.

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

Just a reminder, on that same center NOI calculation, our same center calculation does not include straight-lining the rent, does not include SFAS 141 income.

It's a cash basis number.

It also does not include redevelopment projects coming online -- the benefit of those are not reflected in our same center numbers.

The gross operating margin for the quarter including JVs was up at 66.4%, up from 65.9% a year ago.

Compared to the third quarter of last year dilution from asset sales during the quarter was $0.05 per share, most of which related to assets sold in the second half of 2013.

Bad debt expense for the quarter was $1.7 million -- that compared to $1 million in the third quarter of 2013.

During the quarter we bought a 50% increase in The Gallery Mall in downtown Philadelphia.

As a result of that acquisition, during the third quarter we wrote off approximately $1.4 million of acquisition-related expenses, or $0.01 a share.

Currently average interest rate in the portfolio is down to 4.04%; that compares to point to 4.22% in the third quarter of last year.

The balance sheet continues to be in great shape.

At quarter end, our balance sheet metrics included debt to market cap at 39%, interest coverage ratio 3.2 times, and debt to EBITDA on a forward basis of 7.2 times.

Average debt maturity, 5.3 years, and floating rate debt as a percentage of total debt under 14%.

In our press release this morning we narrowed are 2014 guidance for FFO per share and increased the midpoint by $0.05.

Our FFO per share guidance range is now $3.57 to $3.63.

So although we came in for the quarter $0.01 under the Street, we are guiding for full-year 2014 FFO per share above Street expectation.

Also, we added some additional disclosure information in our 8-K.

You'll note on page 9 we added a new guidance range page that talked about our major assumptions and how they compared to the original guidance.

Some of those include net dispositions guidance for the year which remained in total in the $240 million to $250 million range, consistent with the initial guidance, but [earnings dilution] related to the 2014 asset sales has been reduced by $0.03 as the timing has changed to be later in the year compared to the original guidance.

Same center NOI guidance has been reduced from the midpoint of 4% to the midpoint of 3.63%.

This 37 basis point change amounts to about $3 million over the course of the year or a $0.02 per share decrease.

This adjustment from our original guidance results from downtime on releasing space from significant bankruptcies of Coldwater Creek and Love Culture.

There was a short-term earnings hit, although in most of these locations we are putting in stronger tenants at better rents so there will be a long-term benefit.

For example in the Love Culture space, which is about 88,000 square feet, the mark-to-market on that space is up 50%.

Our initial guidance did not assume any acquisitions.

As a result of buying the JV interest in The Gallery and another small interest we bought earlier in the year, we are now including about $0.02 of 2014 earnings accretions from those transactions.

That number has been reduced by the $1.4 million in acquisition expenses related to The Gallery.

Looking at tenant sales, the portfolio of mall tenant sales per foot came in at $571.

That compared to $549 a year ago.

If you look at that on a same center basis excluding the dispositions, sales per foot were $569 -- that compared to $567 at September 30 of last year.

Looking at total center sales for all tenants in the same center, excluding anchors, our sales increased for the quarter ended September 30 was up to 2.1%.

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

Thank you, Tom, and welcome to our call.

While we never like to give you downward revisions to our estimates, it is important to add a little bit more color to the same center NOI focus that has come out of our earnings release.

As Tom mentioned, we have broken out for you the same center NOI that we -- increase that we have for our top 40 assets which comprise about 88% of our EBITDA compared to our bottom 11 assets which are about the balance of 12%.

As you can take a look at our supplemental filing, you can see that the top 40 assets had same center NOI increases of 4.1% for the nine months ended September 2014, which compares to 4.6% in 2013, 3.8% in 2012, 4.1% for these assets in 2011.

So very strong growth amongst our top 40 assets.

And this really validates when you take a look at the same center NOI growth that we have from our bottom 11 assets.

Our decision to significantly prune our portfolio and to dispose of about $1 billion of assets over the last couple of years and to redeploy that money into our best assets.

Dialing in a little bit deeper into the same center NOI numbers, if you take a look at our top 40 assets with a 4.1% same center NOI increase, we had significant transition going on at three of our very best centers.

Queens Center is going through a 10-year rollover in leases.

Tysons Corner is going through not only a 10-year rollover in the expansion leasing, but also the whole introduction of new tenants that are coming as part of the densification project that we have there.

And we are going through a very significant remerchandising of Kings Plaza in Brooklyn.

All three of these centers remain in our same center pool, and while these three centers represent a significant component of our EBITDA at about 14% of the top 40 centers in terms of EBITDA, their same center growth for the year has been relatively flat to date.

And that's really totally due to frictional vacancy and conscious remerchandising decisions.

They will be the source of significant growth for us in years to come.

But, again, if you take a look at the same center pool amongst our top 40 and you take these three assets that were relatively flat for the year, the other 37 of the top 40 assets actually were up about 4.7% year to date.

So, look, there are very, very -- it's a lot of numbers that play into the same center number.

I will say that it does have a touch of two dimensionality to it, and I would much rather increase my EBITDA at our top centers than at our bottom centers, but we are very conscious of the focus that people have on same center NOI.

And we are very confident that based upon the pruning that we had gone through in our portfolio, based upon the leasing results that we have been achieving here over an extended period of time and those that the project for the year to come as well as all of the redevelopment that we have underway and expansions, that we are very well poised to get significant growth out of our portfolio.

I want to now turn to dispositions and acquisitions.

On our last call we had indicated that we felt that we would have net dispositions of about $250 million for the year.

At that point in time we did not have any centers that were under contract to be sold.

Today we have a couple of properties that are currently under contract to be sold which we estimate will close before the end of the year.

Those will generate proceeds to us up about $300 million.

We outlined one of the centers -- South Towne Center in Salt Lake that is currently under contract and is estimated to close over the next 30 days.

And there is one other property that will be disclosed if and when it closes, which we anticipate that it will.

On the acquisition front, we were a little bit of disadvantage on our last call because while we knew that we were going to be entering into a joint venture on The Gallery, all of the final approvals and documents had not been signed -- we knew that it was imminent, that it was going to be done.

But we have a policy of not identifying acquisitions until they are done.

So we were not really able to talk at all about The Gallery on our last call.

We are extremely pleased to have entered into a joint venture with Penn REIT to own 50% of The Gallery in Philadelphia.

This week we had the opening of Century 21, which is a new-to-market retailer to the property, and over the next six months we anticipate that we will be in a position to lay out for you both the dollars spend that we would anticipate that the venture would make, as well as the return expectations, but rest assured that we see very significant redevelopment opportunities at The Gallery.

We believe that the 8% to 10% returns that we see on our redevelopment and expansion pipeline that we see throughout our Company, that these are clearly attainable at The Gallery.

And we look forward to sharing those projections with you once all of our entitlements are done and once the numbers are further refined.

Furthermore, on acquisitions we find ourselves in a little bit of an uncomfortable position today about acquisitions, also because having just given you revised guidance for the year, we also have reason to believe that there is in acquisition that will close before the end of the year.

It is not currently under contract; otherwise we could potentially talk a little bit more about it.

So stay tuned on that and hopefully we will be able to report to you that we've added a very nice acquisition to the portfolio between now and the balance of the year.

So again, really just to recap the big story here is that the pruning that we outlined that we were going to do here in our Company two years ago is largely complete.

We've recycled about $1 billion and repatriated about $1 billion of proceeds with the closings that are projected over the next month or so back into our Company and recycled those into the best assets that we own.

Our redevelopment pipeline remains very strong.

Everything is moving exactly on budget and on pace within our redevelopment pipeline.

One of the next critical junctures in our redevelopment pipeline is the opening of the expansion of Fashion Outlets of Niagara which opens up next week well over 90% leased and showing returns of double-digit returns on the incremental spend.

So, we are very pleased with the fundamentals that we have here and with our prospects for growth going forward.

With that, we would like to open it up for questions.

(Operator Instructions)

Christy McElroy, Citigroup.

Art, just a follow-up on the dispositions.

Last quarter you implied, as you said, that nothing was in the works on the disposition side, but during the quarter obviously you went under contract on South Towne.

It sounds like you have another one in the works.

What's changed?

And can you provide just a little bit of color on demand for B and C malls today -- maybe just some general comments on the market?

Well, nothing has really changed other than when you are on a call and you are asked the question and you are deep in the negotiations in terms of a disposition but it's not signed or the buyer is not hard on their deposits or finished their due diligence, there's nothing much you can really say.

Nothing certainly that adds to your position of leverage as a seller.

So it's best to be somewhat vague in terms of that.

But we had projected on our last call that we would have net dispositions of $250, which is net of the $100 million acquisition of The Gallery.

At the end of the year, I think we will end up at gross dispositions of $350 million and net of the $250 million, just as we had said, even though about $300 million of that disposition number was not under contract three months ago.

The market remains very good.

There are buyers that are out there that are constantly emerging.

One of the transactions -- actually the next two transactions that we have under contract are each with buyers that we had not transacted any of our other mall dispositions with.

So the pool is expanding and the pool remains strong.

Okay.

And then just regarding the downtime on the Love Culture and Coldwater Creek space, when do you expect those move-ins?

I think you mentioned 50% mark-to-market on the Love Culture space.

What's the mark-to-market on the Coldwater Creek?

Bobby, do you want to --?

Sure.

This is Bob Perlmutter.

The mark-to-market on the Coldwater Creek space is not as high as the Love Culture is.

We had 10 Love Culture stores before they assumed the leases so there was no change in that and six we're in the process of re-leasing.

We think most of the Love Culture and Coldwater Creek spaces get released over the next 12 to 18 months.

So it should be released in 2015 -- the majority of the spaces.

And we are patient on the spaces.

Several of the Love Culture spaces in particular are in very good locations within some very good centers, and we may have had a disproportionate exposure to Love Culture just because of how their growth got laid out as a company.

But the good news is that the real estate that we are getting back, that we have taken back is in great centers.

And we are going to be patient in great centers and really chase the correct merchandising decision as well as a the correct rental structure that will add NAV to the properties even if that means that they will be vacant for a quarter or two extra.

We are not chasing quarterly results here; we are chasing value creation.

And I think that feeling on the real estate was illustrated by the fact that we chose not to restructure the leases, which is what they would have preferred in the bankruptcy, knowing that we had a lot of confidence in the real estate in the centers they were at.

Okay.

Great.

Thank you.

Craig Schmidt, Bank of America.

Good afternoon.

What is the next step for The Gallery?

Is it the public assistance and then you can proceed forward for is there another step before that?

It's entitlements in general but we are very confident that we are headed in the right direction there with our partner, and we are really bullish on the leasing conversations that we've had with retailers to come to the property.

We are in a position, though, where we are still perfecting our entitlements including arrangements between us and the governmental authorities.

So once those are finished, we will lay out with the same degree of specificity that we do all of our development and redevelopment projects for you -- the dollar spend and the return expectations as well as the timing.

But we feel very good about where we are.

We've had numerous development meetings with our partner as well as numerous meetings with city and state officials, and we are in conversations with many tenants, so we feel very good about our investment there.

Great.

And then on Paradise Valley, where does that redevelopment stand?

We are continuing to talk to significant new junior anchors and anchors to come into the center, and at this point in time, part of it would be the possibility of recycling some department store space -- maybe one of the department stores.

So, we are being patient there, and we are still optimistic that there is a good answer for that property.

It's a solid citizen today, and we are very confident that it can be repositioned to service its immediate trade area in a better way than it currently does.

Okay.

Thank you.

Rich Moore, RBC Capital Markets.

Good morning, guys.

A question for you on CPI and the CPI bumps that you guys have in the leases.

How much does that and the fact that we have no CPI to speak of hurt same-store?

Rich, we typically do the calculation effective January 1, and it takes the CPI for the period the year ended end of October the year before, and in the case of this year the CPI was 1.1% for that period of time.

We typically have a multiplier in our leases of two or three times CPI.

And then often the retailer will negotiate for a ceiling of 3%.

So it was unusual in 2014 that some of the CPI increases did not max out at that 3%; some of them by calculation did not get that high -- that's a little bit unusual.

I think if you look back right now, where CPI is over the last 12 months, it's running about 1.8% or 1.9%.

So we won't have that situation in 2015 when we do the calculations.

So 2014 was a little bit unusual in that regard.

Just to follow on to that, you raise a very good question because we are putting up very strong releasing spreads even though it's basically new cash to old cash as opposed to new straight-line to old straight-line.

If we were reporting our releasing spreads using new straight-line to old straight-line, our releasing spreads would be significantly higher and our same center NOI growth would be at least 50 to 75 basis points higher just by virtue of the method that we have elected to go with in terms of our rental spreads.

We always -- going back several years ago which we just did not like recording phantom income, and we preferred to have our income the as close to cash as possible.

The retailers like it, also.

And -- but embedded in our leasing structure, if we are by comparison the only mall company that is predominately using CPI cash to cash type of clauses as opposed to straight-line, then we are penalizing our same center NOI numbers by at least 50 basis points a year.

But it's the right decision for us for our portfolio in our opinion.

Good.

Thank you, Art.

And then just to follow up on that real quick, guys, staying on the same-store NOI theme, how much of the fact that those 11 assets at the bottom of the sales-per-square-foot pool underperform on a same-store NOI basis is sort of self-fulfilling in the sense that you don't put a lot of capital into those, you don't spend a lot of time on those compared to the ones that have higher sales per square foot?

I wouldn't read too much into that one because, frankly, one of the reasons that we had decided to prune our portfolio is that we find that we treat all of our children with love.

So even centers that don't generate a lot of EBITDA, it's hard to ignore them.

So you do pay attention to them.

So I'm not going to say it's based upon not paying attention to them or not even putting money into them.

The money decision is a different issue.

Money should only be spent where it can get the best possible returns and, generally speaking, we find that we get the best returns by deploying capital in our best centers.

Okay.

Great.

Thank you.

D.J. Busch, Green Street Advisors.

Art, I know you spent a lot of time on the last call talking about occupancy cost ratios, but just looking at the property -- sales per square foot by property -- looking at the 10 to 20 or the 11 to 20, occupancy at 97%, obviously you seen much higher than that if you exclude what's going on at Kings Plaza.

Cost ratios sub-13% or 100 basis points lower than the top 10 -- do you see just as much rent growth opportunity in that second 10 grouping as you do in your top 10 assets?

Actually, it's a good question.

The answer is, yes.

Can you quantify that at all or is it just -- how much higher can you --?

They are all great centers.

The fact that they just happen to not be in our top 10 doesn't mean that in some people's companies -- 11 through 20 here would be one through 10 elsewhere.

But they are great centers and there's a story behind each and every one of them.

They are all very solid citizens.

Kings Plaza, Cerritos, Arrowhead, Kierland, Danbury, Fashion Outlets of Chicago, Freehold, Fresno Fashion Fair, Modesto -- these are some of our best properties, and there is significant continued room to grow.

Not all of them have Neiman Marcus or Nordstrom in them.

Not all of them have Apple in them either.

So that does influence some of the numbers, but when you look at our same center NOI growth actually 11 through 20 outperformed probably one through 10, as I think about it, because we are very patient when we are making decisions at all of these properties.

But we probably tend to be a little bit more forward thinking in the great properties.

We really want to make sure you are getting the right rents and making the right merchandising decisions.

But you actually have focused on a decile of centers for us that as I was looking at our same center NOI numbers over the past couple of years, that 11 through 20 category, they have been dabbing at a very high batting average.

Bob, do you have want to add anything?

The only thing I would add, Art, is many of these are also -- because the metric of sorting is sales per square foot, many of these are larger contributors as well from an NOI standpoint.

Right.

And then just one quick follow-up, following up on one of Rich's points, just looking at the bottom 11 assets, occupancy grew quite a bit, but obviously NOI is going in the wrong [direction].

What are you able to sign from an occupancy cost ratio standpoint with a portfolio of $300 a square foot, or is that normalized occupancy (inaudible)?

This is Bob Perlmutter.

I'm not as certain that there is a number that becomes the occupancy costs.

A lot depends on whether the tenant is already in the center or not.

A lot depends on the capital structure for new leases in terms of limiting or mitigating the capital that the tenant puts in.

A lot of it depends if it's part of a market strategy or a single market store.

So I think the occupancy costs is one factor, but it becomes less important as you move down the tier of centers.

But it is -- conversely, it is also true that the higher the sales per foot of the property, the higher the rent can be as a percentage of sales.

So it really gets to be geometric, the opportunities that you get in the great centers.

Right.

Okay.

Thank you very much.

Alex Goldfarb, Sandler O'Neill.

Good morning out there.

First question is a two-parter, but it both centers around the same-store NOI.

The first part of the question is, given that lower bucket is definitely dragging on your same-store NOI, what do you think -- what percentage or how much of that bucket do you think will be left by the time we get to the end of next year?

And then second part of the NOI question is, a while back you guys had spoken about converting temp to perm, which would think would be additive and would help boost NOI.

So just sort of curious how much of a benefit that you are seeing from that and how much we should think of that adding going forward?

We are going to try not to penalize you for having 2 1/2 questions there, Alex.

Good question.

I'll be open with you and tell you that on a temp to perm, I think our being patient and making the right decision for the real estate has not caused that conversion to happen as dynamically as maybe everybody would like to see it happen.

It's not quite as simple as marking a space to market, but it's clearly -- look, the stronger your portfolio, the bigger the opportunity to convert those temps to perms.

But we want to make it the right perm.

After you have been patient for a period of time, we don't want to convert from temp to perm just to report that we have done that conversion.

This past quarter it was flat, Alex, and the reason for that is some of the space we got back from Coldwater Creek and Love Culture was filled temporarily.

We added temp while we are now seeking the new perm.

Exactly.

So that's why that number didn't decline for the quarter.

I missed one of your questions, Alex.

Which one did I miss?

It was the bottom -- the 41 to 52 bucket.

That's 9% of your NOI and that same-store NOI is dragging.

It seems like you guys are still at a pretty good clip of disposing of assets.

How much waiting -- where do you think that bucket is going to be at the end of next year?

Well, I would rather not answer it for the end of next year.

We will clearly when we give guidance for next year, as we have for the past couple of years, we will be as precise as we can be about where dispositions fit in that picture, so if you don't mind we will address that as part of the guidance.

Look, the percentage of the EBITDA that comes from that bottom 11 assets is now under 10%, and I see that number continuing to shrink, both as a consequence of dispositions periodically but also as a consequence of adding either to the size through expansion, or repositioning through redevelopment, or periodically acquiring centers that end up being in your top 10 or 20.

Okay.

And I'll leave my two questions there.

So thank you.

Vincent Chao, Deutsche Bank.

Hi, everyone.

Just a quick question -- Sears has been in the news quite a bit in terms of fundraising.

Just curious if they have been more active with you guys in terms of looking to monetize some of their assets inside your boxes say over the past six months or so.

I don't say that I would say more active.

I will tell you that the conversations that we have with them are relatively more frequent these days than they have been at times.

I do think that there feels like that there is some rationalizations that are occurring at Sears that are positive.

I think that the Primark announcement could be a net positive for the properties that they announced that they were doing some subletting to Primark.

In fact, we're in conversations with Primark both on some situations that we have that we have presented to Primark, but also in collaboration with Sears.

So, I'd say in terms of their appetite to rationalize and monetize that they are getting a little more urgency to their actions there, and I think it can be very positive for our centers.

Okay.

Thanks for that.

And then just on the overall back-to-school season, just curious if you would just share some thoughts on what you guys saw -- obviously the sales growth did tick up there, but I don't know if that had to do with Apple or not.

But beyond that, just curious what your thoughts were there.

I would say that in general most of the retailers would have said that it was sort of a mixed back-to-school.

Certain brands, certain categories did well; others did not.

I think most are going into the holiday generally cautious with moderate expectations.

In terms of ticking up, Apple sales benefited in the portfolio in September with the releases but are still down year to date.

Okay.

Thank you.

Mike Mueller, JPMorgan.

I guess for Chicago, does that asset get expanded anytime soon?

Are you talking about Fashion Outlets of Chicago or North Bridge?

No, sorry, Fashion Outlets of Chicago.

Sorry.

No.

Okay.

And then going to the occupancy increase -- 130 basis points same-store, did anything stand out as impacting that disproportionately, either, say, on a regional basis or anything else?

No, I don't think so.

It was pretty much across the board in terms of quality of center or the regions.

Okay.

That was it.

Thank you.

Todd Thomas, KeyBanc Capital Markets.

Thanks.

Good morning.

Just in terms of the acquisition that you expect to close by year end, I was just wondering if you could maybe share whether it's a traditional mall asset or a mixed use or urban type asset, and then also whether it's located in an existing market where Macerich has exposure today?

It's a full retail, no mixed use.

It's in one of our gateway markets, and, again, I can't project that is going to happen because it's not under contract.

But my sense of it is that it probably may happen, but yet it's not built into our revised guidance numbers.

If we had built it into our revised guidance numbers, our guidance numbers would've gone up.

Okay.

Got it.

And with regard to The Gallery, really Philadelphia I guess just being a new market for Macerich fits with your urban growth philosophy.

Do you think that there are some other opportunities either in Center City or in the MSA?

Or do you suspect that The Gallery will be a one-off opportunity in that market?

I would say it's one-off for us in that market.

I will remind you that we do have a full price mall not that far away which has been performing extremely well -- Deptford Mall.

But we are thrilled to be there.

It's a very -- it's in that DC-New York corridor which has been so good to us, and owning great assets in that market puts you in a unique position for retailers as they lay out their expansion plans.

And Primark in particular, for example, if you look at them, their initial expansion into the US is all in the Northeast, including -- they are looking at Philadelphia.

They are coming to Philadelphia and other markets in the Northeast which has been great for us.

Okay.

Thank you.

Caitlin Burrows, Goldman Sachs.

Hello.

You've had a lot of success adding fast fashion junior anchors like H&M, Uniglo, and Zara to your portfolio.

Could you talk about what kind of rents those larger tenants pay and whether there's any instances of, call it, rent sacrifice as you merge the in-line higher rent paying tenants to create the larger stores?

Well, they don't pay enough rent.

We'll start with that.

But that's what we tell them, also.

But, Bobby -- I think it's a very good question, and I think you are alluding to the answer which is you have to look at what it does for not only the square footage that you are dealing with -- one of those significant users -- but also what the ripple effect and the domino effect is.

Maybe Bob you can add some color to that piece of the question.

I mean, clearly, the larger format fast fashion apparel retailers negotiate their real estate very hard, and they know the benefit that they bring locating it in a center.

So in terms of rents, as Art said, it's never enough in our mind, but they do bring an important element to the property.

One is the sales generation of incremental dollars, which obviously allows us hopefully to capture market share.

From a leasing standpoint we often find -- not always -- but often find that their rental structure is often a push, a slight increase to slight decrease to the rents that we have in place.

But the real benefit is taking the retailers who are in place and relocating them elsewhere inside the shopping center, often in lesser locations but generally at higher rents than the tenants that were previously occupying the space.

So most of the rent growth isn't in the fast fashion deal itself -- that's generally more neutral.

Much of the benefit comes from moving the tenants that are inside their footprint to other locations in the mall at higher rents and improving the occupancies.

Got it.

Okay.

And then also back to the topic of occupancy costs.

I know you guys have mentioned in the past that you think A mall occupancy costs could increase.

I was just wondering, would you say that's more because of higher rents or lower sales?

And then also do you think tenants are willing to pay for a show rooming factor just to have a physical presence in your centers?

Well, it's actually the web rooming is what's happening, where people are researching online and then buying in the store, which is really kind of the evolution of what show rooming was with Best Buy and Target and folks like that a few years ago in the press.

The rent growth in the great centers is in the recycling of the bottom 25% to 30% of the producers in any given center out of the centers as you remerchandise the centers constantly, and bringing in retailers that are going to do better than the mall average.

And that's really a big source of rent growth in terms of the future.

And actually, you can have growth and significant EBITDA growth in a great center and yet the observed cost of occupancy as a percentage of sales even in a rising sales environment can go down, because you are taking tenants that were paying you, let's say, 35% of sales doing $300 a foot and you are replacing them with say a tenant that's going to pay you 15% of sales and do $1000 a foot by way of example.

And you actually go forward in terms of your EBITDA, but you actually reduce your cost of occupancy as a percentage of sales.

We have been saying that costs of occupancy as a percentage of sales is at best two-dimensional and maybe not even that deep.

You have to be very careful when trying to mark a shopping center to market from afar just by looking at that one number.

So that's why we try and give you full disclosure and as much disclosure on all of these metrics as we feel can be helpful to you.

But there is no ceiling on a great center.

The opportunity really has nothing to do with the percentage of rents as a percentage of sales.

It's really bringing in the best retailers who -- in fact they do pay for the opportunity to have the great flagship locations, which further augments their overall omni-channel strategies.

Okay.

Great.

Thanks.

Jim Sullivan, Cowen and Company.

Thank you, good morning.

I've got a question for you again on this group 5 and maybe this should go under the heading of no good deed goes unpunished.

We do like the additional disclosure, but what strikes me looking at the numbers is that the metrics in those centers are not really that bad.

Sales per foot have been -- were slightly up over the last year.

Occupancy rate up quite a bit.

Occupancy costs as a percentage of sales actually up, and yet we have negative 3.4% same-store NOI.

What's the piece that I am missing that explains why in spite of relatively good metrics that the same-store NOI decline is so big?

Jim, this is Bob Perlmutter.

A lot of it at these centers reflects renewal lease rates at much lower occupancy costs.

So what you don't see is the tenant who expires and was on a rent based on sales productivity 10 years ago that rolls to a lower rent even though they stay in place and even though their sales don't change.

Interesting.

And second question also, Bob, maybe you can address this.

Talked about Kings Plaza in the prepared comments, and I know we saw maybe six months or so ago a spate of announcements -- I think there were about three or four new tenants who were going to go in there that, I guess, should categorize as an upgrade, and I guess more in line with the type of tenant base at Queens Center.

I wonder if you can give us an update as to what you are seeing there and your hopes for that center over the next year?

You know from a leasing standpoint the team has made really good progress.

Some of the new deals that have either opened or signed include Michael Kors, which is obviously a great addition to the center; Guess; Starbucks; KIKO Cosmetics, which is interesting.

This is an Italian-based retailer that is coming to the United States.

House of Hoops, Vans, Old Navy, Justice.

So a combination of juniors and better quality specialty tenants.

So, we are pretty pleased.

The center has started a physical renovation; we are correcting all of the deferred maintenance.

So, we feel like we are making real progress, and, of course, longer-term the opportunity there is to repurpose the Sears building.

And what is the timing on that, on the Sears building?

We'll announce it when we have something specific to talk about on that.

Right now, we've decided that we wanted to completely remerchandise the center, but we felt it was more appropriate to focus on the in-mall space first and get a little traction there and get it some positive direction there before tackling the 330,000-square-foot Sears conversation, which remains a conversation.

Okay.

Thanks.

Paul Morgan, MLV &Co.

Just a couple of questions on Tysons.

You mentioned that that along with Queens and Kings as being one of the malls where, counterintuitively, NOI hasn't gone up because of the transition on some of the leasing there.

Could you talk a little bit about the upside that you think you will see in that wing?

And then maybe also a little color on just what you've seen in terms of the impact of the Metro being open on traffic and sales.

In 2005 when we bought Tysons, our joint venture interest there, and simultaneously went about the business of expanding the mall through the we demise of the old JC Penny building and the addition of an entertainment wing, that expansion which is -- Bob, you can help me with some numbers -- but it was over 150,000 foot of space that we went into that expansion, and it would not at all surprised me if Bob were to tell me we have a 50% mark-to-market in that space over time here.

But what happens is that particularly when you are dealing with renewals in a great center, the easy thing to do is to keep a tenant in place and take your rent increase and have no downtime.

But also not have a new tenant.

Harder thing to do which sometimes comes at the short-term expense of quarterly earnings or quarterly same center NOI is to bite the bullet with an underproductive tenant and to either relocate them to a lesser location in a center or just not to renew them.

And when you do that, generally speaking, you are talking about bringing in a retailer that is going to have a compelling use, and you are talking about at least six to nine months minimum of downtime on the recycling of any one of those spaces.

And when you are dealing with centers where the rents are extremely high, you feel the pain.

But it's the right decision to make for the center.

We've been through -- in 40 years of doing this, I've probably been through -- I can't even tell you how many 10-year rollovers in our different properties.

But this is what happens.

And on the average properties you tend to just renew, but on the great properties you tend to be very selective about renewing tenants and you only want to focus on the tenants that you believe can do significantly higher than an already high sales per foot average in a mall.

Bob, do you want to --?

Well, the only thing I would add is Tysons is one of the centers where we see the retailers seeking to put flagship stores for a variety of reasons that we discussed earlier.

And really looking to upsize their store presentation there.

And, most importantly, willing to pay a premium for that upsized space.

As Art mentioned, the mixed-use developments and the connection to the center sits in an area that has significant rollover and over the next two to three years.

That's one of our best opportunities at the center and what we've done is we've sort of put together a collection of flagship stores that bridge the entry from the mixed use into the mall.

Long-term, it's a very positive economic result.

It's a very positive result from a merchandising mix.

In 2014, we opened the two-level Gap store.

2014 -- in a couple of weeks we are also going to open a two-level Zara store.

In 2015, we are going to open up a two-level Victoria's Secret and PINK right at the entrance.

And what it's doing is setting the stage for the releasing of this expansion wing over the next 24 months.

In the short-term what is done is it's created some vacancy that we are running at a lower-weighted occupancy through 2014, which affects the year-over-year numbers.

And, as Art said, it's a major contributor to our income.

In terms of sales, the sales in September were up 5.4% for the center, so, again, an indication that we are getting a very positive impact from the mixed use.

Next time you have an opportunity to be there, the activity that is happening with the connection to the train station and the plaza being open for business and the new traffic that's being generated to the second level of what was a wing that was anchored with Lord & Taylor on one bookend and a theater and Barnes & Noble on the other bookend has really created a new sense of the 50 yard line or center of gravity for the center.

And the smart forward-looking forward thinking retailers are grabbing -- it's a land grab.

They are grabbing and they are willing to pay -- this is the counterintuitive one -- they are actually willing to pay more rent and sometimes more rent per foot for bigger spaces in a great location like Tysons Corner because of all the other things that it does for them as a retailer.

So is 2015 still sort of a transitional year in terms of the NOI there?

And we should think of 2016 as kind of where you will really going to get done and see all the uplift?

No.

We think a significant impact happens in both 2015 and 2016.

Great.

Thanks.

But obviously, we are making what we know is the right decision for the real estate.

We are operating with -- all cylinders of this property are clicking at a very high performance level, and we still have many good things to come.

We have to opening of the hotel coming up in a few months, the opening of the residential project, the complete fill-up of the office tower.

And just the awareness that the project has gotten in the trade area -- it's really hard to imagine that it's put Tysons back on the map because it always was on a global map.

But it has really opened up our trade area and the traffic to the center, the rail stations, and it's enabled the tourists that go to the capital to come out to Tysons without renting a car, without going through the expense of driving, and the time commitment.

So it's got a very bright future.

Thanks.

Haendel St.

Juste, Morgan Stanley.

So my first question is, I guess, more of a clarification -- and apologies if I missed this; it's been a long day -- actually it's been a long week and it's barely Wednesday.

Was wondering if you have factored in a faster pace of temp to perm into your original guidance which could perhaps explain some of the reduced outlook?

I think we did touch upon it a little bit and one thing we did say -- Tom, do you want to go ahead and jump in on that?

Yes.

It did change from initial guidance, Haendel, because as we mentioned earlier in the call we had a significant amount of space that came back from the bankruptcies of Love Culture and Coldwater Creek, and as a result, some of that space has been temporarily leased in the short term as we pursue a permanent solution.

So the number Year over year was flat in terms of temporary occupancy at about 5.7%.

Our stated goal was obviously to reduce that so, yes, that did change subsequent to the initial guidance.

Okay.

Thanks for that.

And secondly, I guess the CMBS financing environment for lower tier malls, given your activity in that segment -- understand that LTVs for larger, more established sponsors on the CMBS side could approach 60%, maybe 70%, even if the property is in a secondary or even tertiary location.

But I'm wondering what the LTVs for local private guys could be?

Is it 50%, 60%?

And if that could be an issue or a limiting factor for you and perhaps some of your peers looking to sell some of these perhaps B and lower quality malls?

I don't see it as a limiting factor.

I've said before and it remains true today that the best friend of a buyer and the best friend of a seller is a liquid debt market because many of these buyers are not public companies and many of these buyers are willing to operate at higher leverage levels.

And if they can obtain the higher leverage levels, it just gives them a projected return on their equity that is more attractive from their viewpoint.

One of the deals -- I mentioned that we are under contract right now in two transactions with buying groups that we have not previously done business with, and I think that each of them are looking at leverage levels that are in the zip code of the range that you had indicated that the big strong sponsors can get, which is well over 50%.

Appreciate it.

Thank you.

But I would not want to put us out there as an expert on the financing of B malls because that's just not much of our business anymore.

Fair enough.

Understood.

Ki Bin Kim, SunTrust.

Thanks.

Just a couple of quick follow-ups on The Gallery.

You briefly mentioned that the rough early estimate might be 8% to 10% in line with your other projects type of return.

But how about from a risk perspective?

Is this a more -- I'm not saying used the word slam-dunk, or is it riskier?

How would you categorize this property?

We feel even better about the opportunity today than we did four months ago, and we are extremely confident that we can execute this redevelopment and repositioning at returns that are consistent with what we shoot for at our best assets.

And we'll give more specifics on the opportunity as we get closer to the date that all the entitlements are finished up.

But on a risk-adjusted basis we feel very comfortable with this investment.

It's sitting there with all the benefits of the mass transit and it's ready -- it just received a big shot in the arm with the introduction of Century 21, its first major flagship outside the New York area.

There is very significant retail demand that we have been able to have in our conversations with the retailers.

So we are very bullish on it.

We feel actually stronger about the opportunity today than we did four months ago.

And just last question.

There's supposed to be talks about a casino going up maybe across the street or somewhere nearby.

Is your personal view that that's a good thing or a bad thing for a project like this?

If I was a lawyer, I would say, asked and answered on the last call.

We actually had that question asked, and we did answer it on the last call but I will answer it again.

It all depends on what type of an operation goes into a proximate area.

I could point to an example that SLS is doing a new luxury hotel just a couple of blocks away from The Gallery, and say, that's a great sign.

As to a casino, look, the interplay of the tourists that would come to a casino and the retailers that would be close to that operation is a proven winning combination at numerous examples across the country.

You can look to Rosemont as an example.

You can look to our Niagara Falls as an example but -- you can look to Las Vegas as an example.

Look at all the retail in Las Vegas that exists so well with the casinos all around it or inside of it.

So, it's a proven -- casinos can generate great foot traffic.

Foot traffic can generate great sales and good tenants.

So, it could be a good thing.

Okay.

Thank you.

At this time, I would like to turn it back to our speakers for any additional or closing remarks.

All right well thank you for joining us on our call.

We look forward to seeing many of you at NAREIT next week and seeing you hopefully at our Investor Day in a couple of weeks here in Santa Monica.

So thank you for joining us.

This concludes today's conference.

Thank you for your participation.