Macerich Co (MAC) 2015 Q1 法說會逐字稿

Welcome to The Macerich Company first-quarter 2015 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.

Thank you everyone for joining us today on the first-quarter 2015 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; Tom O'Hern, Senior Executive Vice President and Chief Financial Officer; Robert Perlmutter, Executive Vice President, Leasing; and John Perry, Senior Vice President Investor Relations.

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

Thank you, Jean.

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

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

It was another very strong quarter.

We are now really starting to see the benefit in our operating results of all of the major portfolio transformation that we have been through the past two years including the sale of 15 malls and the redeployment of that capital into more productive faster growing assets.

Leasing spreads were good again this quarter.

We signed 321,000 square feet of leases, positive releasing spread of 21% over the trailing 12 months.

Mall occupancy hit a high level at 95.4% which was up 30 basis points compared to March 31 of last year.

In looking at the temporary occupancy, we continue to reduce that, that was 5.2%; that compared to 5.5% at March 31 of last year.

We will continue to focus on that area as we continue to see the potential to grow NOI as a result of converting that temporary occupancy to permanent occupancy.

Average mall base rents increased to $54.19.

That was up 10% from a year ago.

FFO for the quarter was at $0.79 compared to $0.81 for the prior year . Reflected in there was $2.2 million of gain on early extinguishment of debt on Lakewood.

Going the other direction was $13.6 million of expenses related to an unsolicited takeover attempt.

Excluding the gain on extinguishment as well as the expenses, FFO came in at $0.86 a share for the quarter, ahead of both our guidance and the consensus estimates.

Impacting the quarter was same center NOI growth at a sector leading 5% compared to last year.

This increase was driven by increased occupancy, positive releasing spreads, annual rent increases and aggressive operating cost management.

The gross margin improved to 66.6%, that was up from 64.9% a year ago, again also driven by occupancy gains, the strong leasing environment including second half of last year, rent bumps as well as expense reductions in the first quarter this year.

Bad debt expense was up slightly $1.6 million compared to $800,000 last year in the first quarter.

Much of that was driven by RadioShack and Wet Seal.

The average interest rate continued to go down.

It was 3.5% at quarter end compared to 4.1% at March 31 of 2014.

The balance sheet is in great shape.

We had the strongest balance sheet that we have had in the history of our Company.

At quarter end, the various balance sheet metrics were debt to market cap 33%, interest coverage ratio 3.5 times, debt to EBITDA on a forward basis 7.2 times, average debt maturity 5.4 years.

Floating-rate debt as a percentage of total debt was 19%, that is somewhat artificially high as we paid off Lakewood during the quarter and we will be refinancing that with a permanent loan.

We have agreed to a $410 million loan, 11 years, 3.43% fixed rate and that is going to be funded this quarter and the proceeds will be used to pay down the line of credit.

In addition, we are in the market to put a long-term fixed-rate loan on the unencumbered Fresno Fashion Fair.

Those proceeds will be in the neighborhood of $320 million to $340 million and those proceeds will also be used primarily to pay down our line of credit.

In the press release this morning based on the strong first-quarter results and our outlook for the rest of the year, we bumped our FFO guidance range up to $3.83 to $3.93.

Also embedded in that increase was an increase in our assumption of same center NOI growth which we bumped 25 basis points to a range of 4.5% to 5% on average for the year.

We had good tenant sales growth during the quarter.

The average portfolio sales per foot for the trailing 12 months was $607.

That compared to $565 a year ago.

If you look at it on a same center basis excluding dispositions that happened over the course of the last 12 months, the same center sales were $604 and that compared to $579 on a same center basis for an increase of 4.3%.

The strongest regions for us were again California and Arizona which were both up strongly.

At this point I would like to turn it over to Bob Perlmutter to discuss the leasing environment.

Thanks, Tom.

The first-quarter leasing activity was solid generating above-average leasing spreads on good velocity.

We continue to see retailers invest their capital into the following venues, A mall locations, outlet centers, flagship locations, and omnichannel retail initiatives.

The quality of the Macerich portfolio is consistent with the retailer objectives which has demonstrated an above average operating metrics.

Areas of strength within the portfolio included one, large format retailers and anchor retailers.

During Q1 over 400,000 square feet of new leases were executed with retailers over 10,000 square feet.

Some of the notable deals completed during the first quarter included Century 21 at Green Acres Mall and Restoration Hardware Gallery who will construct a 50,000 square foot building at the Village at Corte Madera which is the Company's hometown.

Secondly, we are seeing the expansion of core brands from retailers with larger store fleets.

Throughout the portfolio, retailers such as L Brands, Footlocker, Luxottica, Kay Jewelers and Sephora are expanding their square footages and developing new formats.

Within our portfolio, these core tenants represent a significant amount of the square footage and the strength of their business benefits our centers.

Thirdly, there is continued growth from foreign-based retailers.

Demand for space within the center is high as the US markets are viewed favorably with good growth prospects in the coming years.

Most of the attention falls on the fast fashion retailers which include H&M, Zara, and Uniqlo.

Within our portfolio, we have been active with all three including two new deals signed during Q1 with Zara at Broadway Plaza and The Oaks.

While much of the attention is rightly focused on these three players, we also see activity from foreign-based retailers including Adidas, Kooples, Garage, Camper, Lululemon, Espresso, KIKO, Gerry Weber, Joe Malone, Michael Hill and importantly, Primark.

Next, while more limited in their store openings we see demand from emerging specialty brands on either a standalone basis or within the umbrella of larger retail companies.

Examples of larger retail companies developing new brands which generates store expansions include Lululemon's development with Aviva; Gap's expansion of Athleta; Ann Taylor's development of Lou & Grey; H&M's development of & Other Stories; and Macy's purchase of Bluemercury.

New standalone concepts that we have completed deals with include Kit and Ace, who have signed on to the Broadway Plaza expansion, Soft Surroundings, who signed three leases during the quarter; Yellow Box who recently opened at Kierland Commons; Jonathan Adler, who recently opened at Santa Monica Place; and Kendall Scott, who has come into La Encantada.

Finally, we continue to experience growth in the fast casual and full-service restaurant categories.

During the first quarter we signed leases with Shake Shack at Scottsdale Fashion Square and Queens Center bringing our portfolio total to four units.

We also signed deals with Cheesecake Factory at Los Cerritos and Santa Monica.

Both properties are adding state-of-the-art theaters.

We also continue to expand our presence with more traditional players like Chipotle, Starbucks and Teavana.

Regarding 2014 bankruptcies, we have made great progress with the releasing of Coldwater Creek, Juicy and Love Culture.

Within our portfolio, there were a combined 27 locations containing approximately 170,000 square feet.

To date, deals have been completed on approximately 80% of the spaces.

While impacting our occupancy in the short term we have significantly improved the quality of the tenancy and the productivity from these spaces.

New tenants signed for these locations are illustrative of who is active in the marketplace.

Deals completed include Anthropologie, Hanna Andersson, Vera Bradley, Pandora, Michael Kors, Soft Surroundings, Aviva, St.

John's, Uniqlo, Kiehl's and H&M.

Bankruptcies during the first quarter included Wet Seal, RadioShack, Cache, Deb Shops and Body Shop.

In total, these store closures included 52 locations with approximately 113,000 square feet.

This impacted the portfolio occupancy by about 50 basis points in Q1.

Looking forward we believe there are opportunities to increase revenues by one, increasing our total occupancy while continuing to reduce temporary tenant occupancy levels.

Two, significantly increasing the revenue generation and presentation quality within the common areas.

And three, maximizing our leasing spreads based on the continued improvement of the portfolio quality.

In summary, we believe our portfolio is well-positioned in the current retail environment with many must-have locations for retailers in both traditional mall and outlet center format.

Thank you, Bobby and Tom.

As you can tell, we have a terrific quarter and our outlook for the future, the balance of this year on the operating front is extremely strong.

While the focus today on our call is on the business and operating and financial results, I would like to make a few brief comments with respect to recent developments.

We would then like to keep the remainder of the call focused on our strong earnings performance and guidance.

We would appreciate it if you could please keep your questions during the Q&A session focused on our results and outlook.

First, I want to highlight that we always seek to maintain open communication with our shareholders and we value their viewpoints.

Over the past two months together with our lead director, Fred Hubbell, we have spent a significant amount of time speaking with and listening to the majority of our top 30 shareholders.

One of the consistent comments from these meetings is that our shareholders want us to remain focused on the business to ensure that we continue driving outsized returns.

This is our top priority and I can tell you that our entire organization is engaged and energized with a singular focus on performance and shareholder returns.

You will see that as Tom and I continue to share with you the results during the balance of this call and discuss with you a number of our new and recent initiatives.

In addition, our shareholders have also expressed their viewpoints on governance including the difficult decisions that we made in light of the takeover attempt.

The Board did not take these or make these decisions lightly.

The Board only implemented governance changes because it believed they were essential to protecting shareholder value.

We continue to solicit shareholder feedback on this topic and intend to announce several changes in the near future that we believe will further demonstrate the Board's ongoing commitment to sound corporate governance.

Again, these will be announced in the near future.

We are not prepared to get into the details on them today.

I also want to briefly address the nominations that we have received and related litigation.

As the litigation is pending, we will not be commenting further on it today.

In summary and as I noted in our preliminary proxy, we notified the New York Stock Exchange that the record date for the 2015 annual meeting would be March 20, 2015.

Land and Buildings was not a shareholder on March 20.

It acquired 1,100 shares after the record date on March 25 and 26 and submitted its nominations on March 31.

We advised them privately that because they were not a stockholder of record on March 20, that their submission was defective.

The rules to nominate candidates are the same for all stockholders and this matter is now pending before the court.

Now I would like to turn to picking up on the results of our quarter and our prognosis for the balance of the year.

As you can see from the numbers that Tom shared with you, that you have read and the color that Bobby just gave to you, we had a terrific quarter and we see tremendous opportunities for continued growth and value creation at Macerich over the balance of this year and into the future.

We believe that the Company is at an important inflection point with outsized growth coming over the next several years as we reap the benefits of the significant investments we have made in portfolio management and transformation of our portfolio.

Of particular note, it is nice to see that our average sales per foot today on our entire portfolio is in excess of $600 a square foot.

We believe that our focus on the following five major initiatives will play an important role in our ability to continue to deliver enhanced value to our shareholders.

Five initiatives are to continue to drive same center NOI growth at above-average rates; to improve our operating margins and have margin expansion.

Portfolio management is number three.

I am going to be talking about number four, the Sears joint venture that was just announced this morning by Sears.

And number five, our ongoing developments.

In terms of same center NOI growth due to the pruning of our portfolio and the reinvestment of that capital into our highly productive core portfolio, we see the opportunity for superior same center NOI growth both this year and in the years to come.

Our targeted same center NOI growth is now for this year budgeted and guided to be 4.5% to 5% and represents a significant acceleration from past years.

Number two, another major initiative that frankly is the result of a wake-up call on this topic is operating margin expansion.

In addition to the same center NOI growth that we anticipate, we also see the opportunity to increase our operating margins both this year and next.

We believe that in the very foreseeable future which I'm looking out over 24 months, that we have the opportunity to increase our operating margins by at least 400 basis points.

Primarily this will be done through a combination of efficiency projects as well as enhancing the common areas of our malls to improve the customer experience and increase incremental revenues from that area.

Three, portfolio management and capital recycling.

We are currently taking inbounds and sending out outbounds to examine opportunities to monetize assets within our portfolio both through joint ventures as well as through dispositions and to redeploy those proceeds into the most profitable vehicle available to us at that point in time.

We think that through asset monetization and portfolio management that that will help many of you to help to get better transparency and improve your view of the NAV of the Company.

We believe that it will validate the view of the NAV of the Company that management has and that our Board concluded.

Number four, the Sears joint venture.

This was just concluded late last night.

In that transaction, we entered into a transaction very similar to the ones that Sears entered into with two of our other peers.

We are entering into a joint venture for the redevelopment of nine Sears locations that are presently owned and controlled by Sears.

This is a 50-50 joint venture and gives us the right to recapture 50% of the GLA that Sears occupies and to redeploy that.

We are investing $150 million into this joint venture and anticipate just north of a 6% return on our investment in the beginning year with opportunities to profitably reinvest into this joint venture as we identify recycling and redevelopment opportunities at these nine locations.

I would point out that the nine locations that we entered into a joint venture with Sears on have average sales per square foot at the mall itself of $680 a square foot.

The locations are Arrowhead and Chandler in Phoenix; Danbury in Connecticut; Deptford, New Jersey; Freehold, New Jersey; Los Cerritos in Southern California; South Plains in Lubbock; Vintage Fair Modesto and Washington Square in the Greater Portland market.

In addition, concurrently with that transaction, we also entered into an agreement with Sears that gives us the right to recapture the 300,000 square foot store at Kings Plaza with 180 days prior notice.

That really will jump start the next phase of the Kings Plaza redevelopment.

We are just finishing up the remodeling and remerchandising in the mall and we are in talks today for the addition of two to three new anchors and/or junior anchors to redeploy that Sears square footage.

We see great opportunities there.

Moving into the development area, I am not going to go through each of our development pipeline activities because I want to leave plenty of time for questions.

I would just comment upon one in particular and that is Tysons Corner.

It is now coming to completion in terms of the densification project.

Our Board had a meeting at Tysons Corner last week and I would encourage you all to you get an opportunity the next time you're in the marketplace to take a look at what we have accomplished there.

Our office complex is now over 85% leased.

The hotel is open.

The residential tower is having tenants begin to move in this weekend.

The tower is already 25% pre-leased which is significantly above what our residential fee developer had projected at rents that are above our pro forma and are the top of the market in the marketplace.

So in summary, we are extremely bullish on our prospects.

We think that we have a very clear plan to continue to deliver shareholder value and we look forward to discussing that plan and delivering on that plan over the months to come.

Again as a reminder, our call today is to discuss our results for the quarter recently ended.

We are happy to address any questions about financial and operating results, redevelopment initiatives, pipeline and outlook but we will not be commenting further on the other matters that I discussed earlier about governance and litigation.

Thank you in advance for your cooperation and operator, we would like to now open it up for Q&A.

(Operator Instructions).

Michael Mueller, JPMorgan.

I was wondering if you could talk a little bit about the margin expansion opportunities you mentioned, CAM efficiencies and just being able to generate more revenues there?

So again like I mentioned, we had a wake-up call obviously in November when this topic was first brought to the conversation in conjunction with the unsolicited takeover attempt.

And we did a big soul-searching and said are there ways that we can improve our margins?

We have some systemic issues with some of our margins where we do business in major urban market places where the cost of doing business is extremely high primarily from real estate taxes and infrastructure costs.

And those margins will always be different than a suburban location but the revenues and the sales make up for it so the bottom line is the profitability of the mall.

And the urban malls generate huge NOIs even though the margins on balance may not look as attractive as a suburban mall.

But having said that, we did come to the conclusion that we could in fact, through a combination of initiatives and there are dozens and dozens and dozens of initiatives that add up to getting to the ability to increase our margins by 400 basis points, some of them are cost-saving initiatives, some of them are revenue-generating initiatives in a multitude of different areas.

But I think that clearly there is an opportunity which we had been working on any way through the middle of last year and into the end of last year into elevating the common area experience in our malls which includes many different initiatives to improve the customer experience, things like eliminating customer service booths and going to either a virtual concierge or roving concierges and then replacing those service booths with revenue-generating retailers.

And through a combination of expense reductions and common area revenue enhancements, we clearly see that over the next 24 months that there is about a 400 basis point operating margin expansion available to us.

I would say that about 100 basis points of that is pretty well baked into our guidance for this year but there is still lots of upside to be derived in that arena.

Okay, thank you.

Jeff Spector, Bank of America.

Actually it is Craig Schmidt, I am here on behalf of Jeff.

Art, can you share with us some of the results of the valuation work done by Eastdil and how they viewed your ability to create (inaudible) value going forward?

What was the second part of your question?

How they what?

Just maybe what they did in that work that might impact how you see creating value going forward?

They didn't have to do anything other than take a look at the portfolio as a static portfolio simply looking at the income the way that any buyer would look at the income which is on a forward 12-month period of time.

They didn't have to project that into the future, any of the development activity that will be generating huge value.

And simply based upon that work, they were able to share results with the Board and opinions that indicated that the offer that had been put on the table was simply not adequate.

And just on the Sears JV, how did you select the nine centers to go in there?

It seemed like you have a greater proportion of high productivity malls in your store count.

Well, we have been communicating with Sears on this matter since December 10th.

Actually we first approached Sears with the idea of doing a joint venture on their real estate as opposed to them trying to monetize it or build up a development department themselves back in a personal meeting I had with Eddie Lambert on December 10th.

I guess you could say unfortunately I got a little distracted over the coming months from being able to finish our joint venture but I guess, we kind of planted the seed with Eddie and others helped to cultivate the tree and now we are kind of picking the apples off the tree.

So we identified the nine locations that we thought had the most upside in terms of what we could really demonstrate to each other in terms of value.

We agreed on those nine locations and then collateral to that conversation, we talked about several leased locations and one in particular that we had an immediate need for and appetite for that they were willing to cooperate with us on, was Kings Plaza.

So you are right, if you look at the way Green Street has their database, all of the nine locations that we did joint ventures on were A+ to A- type of malls but more importantly since we disclose sales per square foot by property versus others, you can see and know that our nine locations do $680 a square foot which if you compare that to the database that Green Street has on the other transactions, is a significant notch above in quality.

So again I mean look, we are very happy to do this with Sears.

We think it is a very positive step in terms of helping them rationalize and we think there's a lot of upside for the Company and it is immediately accretive to this year's earnings.

Thanks.

Jim Sullivan, Cowen Group

Good morning.

A question, a further question on the operating margin commentary.

You had said, Art, that about 100 basis points of the 400 basis points is already baked into the 2015 guidance.

Just to make sure we understand this, this 4% increase in operating margins by our calculation is something that could work out to be as high as $0.40 a share when fully achieved.

And going back to the November presentation and in Tom O'Hern's part of a presentation, he had talked about same property NOI growth going forward over the next five years in a range of 3.75% to 5.25%.

Am I correct in understanding that the incremental margin or the margin gain here is incremental to that guidance?

Jim, as Art said, 1% had already been factored into our forecast for 2015 at the time we made a presentation so certainly a portion of it is in there.

But with this new focus we would have much more of a bias today toward the upper half of that range we gave in November than we did then.

But yes, 75% of the margin expansion really was not identified at our Investor Day on November 18th.

And therefore putting a number on that, that sounds like to me it is about an incremental $0.30 a share?

You know, I am not sure.

We think of it more in dollars and I think it is a little bit less than $0.30.

Yes, that sounds a little high to me, Jim.

We think of it more -- the total in the $35 million to $40 million ZIP Code and so 75% of that is to be reaped over and above what is in our current guidance for this year.

So that sounds like $0.17 to $0.18?

I will let you do the math on that per share.

Thank you, Jim.

Ki Bin Kim, SunTrust Robinson Humphrey.

Thank you.

So part of that 400 basis points of operating margin you are talking about right now, how much of that has to do maybe with contemplating going from CPI-based leases to fixed CAM because I would imagine in a low-inflation environment that might make a big difference?

None.

Okay.

And in terms of --?

Good question and that could drive that I suppose if I were to think about it but none, that is not in our thinking there.

Okay.

So in terms of the Sears JV, it seems like the current structure that 50% of the space can be taken back and leased out or for better purposes but is that just kind of laid out current structure but eventually if you can make more money on it, it can be higher than 50%?

Yes.

It could be agreed upon by the parties, yes.

Okay, sounds good.

Thank you.

Thank you.

George Auerbach, Credit Suisse.

Art, you mentioned continuing to try to pare back the portfolio and look at dispositions.

Do you have any assets on the market today and I guess more broadly, what would you expect disposition volume to be over the next call it 12 months?

So I would encourage you not to think in terms of dispositions even though that could be part of our plan to monetize assets.

So I think of it in terms of asset monetization and portfolio management.

Dispositions could be a part of that.

Dispositions could also be none of that but we do believe and secondly, there are no properties on the market.

We are having strategic conversations with the logical buyers of 100% assets so those would be disposition conversations.

But more philosophical and kind of identifying what their appetite is, size, geography, things of that nature.

We are also talking to a number of very significant core type of investors on the possibility of doing some joint ventures.

And this is really on the joint venture side of it, a lot of that is driven by an appetite I think to help all of you that are on this call to update your thinking on NAVs and we do believe that we would have a great use of proceeds for that capital if and when we do it but I think look, there is definitely an appetite for -- I think somebody wrote this morning show me the money -- to show you the money, to monetize some assets, to demonstrate values.

And so we had a number of inbound indications of interest and we have reached out to a couple of our core investors that we currently do business with and I think there is going to be an opportunity here to really validate our view on the value of our portfolio while creating significant liquidity for the Company, achieving portfolio management, by hopefully also recycling out of some lower growth assets into higher growth.

And then the ultimate redeployment of that capital which we anticipate could be quite significant will be determined to be whatever is the smartest use of that capital at the point in time that the modernization has been accomplished.

It is definitely in our playbook for this year.

I guess just on the sources and uses then, do you envision yourself being net acquirers of third-party assets just given that you can't really shield the gains from these sales?

I know you have use of proceeds in development but with the gains, do you envision yourselves sort of growing the asset count?

You know, at this point in time it will be whatever we see is the most profitable redeployment of the capital at that point in time.

Thank you.

Ross Nussbaum, UBS.

I guess my question is this.

If $95.50 substantially undervalued the company and you're going to be potentially selling your JV assets, why not use a decent amount of that capital to be recycled into buying back your stock I guess in a balanced way with your capital needs in terms of development, redevelopment.?

That could be one of the most profitable vehicles to redeploy the proceeds at some point in the future.

Could be.

And do you have, remind me, do you have an existing buyback plan in place or is that something that you have got to do?

We do not have one in place today, no.

Okay.

And just as a follow-up, I think your March 31 release also talked about selectively expanding the outlet program.

Can you give us a sense of what is in the pipeline over the next couple of years in terms of new outlet development beyond San Francisco?

You know, given that it is really selective, it is really just more of an avenue that we intend to continue to pursue, I think the possibility of expanding Fashion Outlets of Chicago is in our future.

We just completed the expansion of Fashion Outlets of Niagara.

I think that the Candlestick Fashion Outlets at San Francisco we are already pre-leasing it, that is going to be terrific.

We are well underway in terms of the rebranding of our project with Penn REIT in Philadelphia.

So we've got a lot on our plate and a lot to execute on that are going to be very meaningful.

Having said that, we are definitely trying to source opportunities that are of that quality going forward but given that we have such a high bar in terms of what we are seeking to achieve, this could be it for now.

We have always said that we see us having a handful of these assets but that we want them to be dominant.

If we are able to uncover further opportunities, then that would be great.

Thank you.

Haendel St.

Juste, Morgan Stanley.

So, Art, can you talk about the tenor of your conversation you are having with tenants and how that might have changed over the past year or so as your portfolio quality has improved?

Your leasing spreads remained here in the low 20s for the past couple of years despite selling a number of lower tier malls.

So curious on perhaps maybe you can give some color on how that looks for maybe some of your top tier versus maybe some of your mid-tier malls.

And then how we should think about that going forward?

And I ask because obviously your portfolio quality has improved.

You have some of the best dirt and best locations out there but your pricing power doesn't appear to have taken as much hold perhaps as I would have thought or seen and especially as you jettison some of your lower quality assets.

Well, I'm going to ask Bob Perlmutter to give you color.

I'm not sure I would necessarily say that our pricing power hasn't been revealed because I think that our releasing spreads have been up the top in our sector, they are certainly up there.

But look, our leasing conversations are back and forth and we seek to make deals with tenants that we think are the right merchants for our malls.

Sometimes we don't go for just the highest rent, sometimes we go for the right merchant and so I'm going to ask Bob to talk though and give you more color on what we see here.

I think what we have seen from a spread, you are right, the percentage increase has been relatively consistent and at the higher end of the range but obviously we are finding some much higher rents and much higher average rents was in the center as the portfolio improves.

We see pricing power improving because we are out of a situation of reverse leverage where the tenants know that they have an equal seat at the table with the desire to keep stores open at lesser quality centers.

So we feel like we have been able to accomplish a similar percentage increase on a higher rental rate which is an indication that the strategy of pruning the portfolio is the right one.

Can you give any incremental color on how perhaps those spreads differ between some of your higher productivity and more mid-productivity mall?

Clearly the higher productivity malls as a general rule are generating higher levels of spreads but the spreads are positive generally throughout the entire portfolio.

Okay.

Christy McElroy, Citi.

Good morning.

Just following up on your comments just further on monetized assets, you mentioned that the monetizations would provide clarity on NAV.

I'm wondering if you can share with us the Board's view of the current NAV of the Company?

The Board's view is that it was substantially above the offer that was on the table.

Art, it is Michael Bilerman speaking.

Good morning.

Just a question, I remember at investor day when you did the deal with Cadillac and they took stock in the enterprise, in the Company.

You had said that the desire was for them to go up to 15% and that they wanted to go up to 15%.

I'm just curious, why hasn't that happened yet and is there any reason why it hasn't happened?

Well, there was an announcement the day after we did that deal with them that kind of put them into a difficult position in terms of being able to buy stock.

But what we did is, look, they asked for a waiver to go up to 14% and change; we gave them a waiver.

And there have been probably periods of time that they may have been precluded from buying stock during the recent events, if you could imagine that that could be part of the case here.

So going forward, I have no idea what they are going to do.

They have the right to buy shares to go up to a certain number.

It is really their choice, and they will make that decision on their own.

Okay, thank you.

Alexander Goldfarb, Sandler O'Neill.

Just a question here going back to the margin.

First, is 400 basis points, is that the most that you think you can improve, or you think you can improve it further?

And what are the hindrances sort of in the near-term over the next 24 months; what would be the hindrances to you hitting that 400 basis points?

I understand obviously 100 is already in the bag, but what is the hindrance to getting that other 300?

The only hindrance would be our imagination.

But having said that, look, we have a big wake-up call on this.

We sat down and we said, can we do things better and smarter here?

And through multiple, multiple thoughts, we came to the conclusion that we can.

To me, no, 400 is not the end game.

It is just what I can feel comfortable saying that I see us being able to accomplish on this one metric over the next 24 months.

I could tell you that with my operating team, I have a significantly higher number just in terms of revenue generation that I see that we can achieve over the next 2 to 5 years, and I am sure that they will accomplish it.

And just a follow-up question.

On the Sears (technical difficulty), the other two peers made a $33 million investment in Seritage.

Do you guys make the same or was that not in the release or you guys didn't have to do that?

We did not have to do that.

Okay.

Thank you.

I am not saying -- it very well could be a great investment, I believe it might be but it was not part of our deal.

Okay, thanks.

Steve Sakwa, Evercore ISI.

Thanks.

Two questions, one, I noticed that the property management company loss widened between 1Q 2014 and 1Q 2015 by about $6 million.

I'm just wondering were there any sort of -- I won't say accounting changes -- but were there any differences that you guys did?

Was there anything because of the joint venture that might have changed classifications?

What sort of explains that $6 million link?

It is primarily timing.

First-quarter is the bonus payment and a lot of the bonus payments are tied to total shareholder return and 2014 was a very good year so bonuses were bigger for the management team than they were the prior year.

That is the biggest difference there.

So that large swing of $6 million is largely bonus payments?

It is not the whole thing, it is about 60% of it and then there is a variety of other things in there.

It will even out over the course of the year.

That is just a one quarter anomaly.

Okay.

I guess, Art, just going back to the asset sales and sort of trying to put some markers on the board, can you just maybe talk about the potential timing of those?

Are those transactions that may take place in the next three months, by the end of the year or over the next 12 months?

Just help us sort of frame out the timing of when these transactions may actually transpire.

This year.

If I gave you a date you could imagine that would put me at a disadvantage in negotiating with the counterparty.

But definitely this year.

And the conversations are active but nothing is on the market.

Okay.

And then just the last question, as you think about renovations and expansions -- .

This is definitely your bonus question, Steve.

Okay, I will make it quick.

Just in terms of renovations and expansions, you've got a large shadow pipeline of A projects.

But are you thinking about that pipeline differently today as we move into the cycle or five, six years in?

Are you doing things differently, are you derisking?

What has changed in your thought process?

Well, good question.

I'm glad you asked it.

So I think that we have made a decision a few years ago but clearly it is validated today that the best possible place we can put our money is into proven winners.

So our focus is going to be on the redevelopment and expansion of proven winners and I think by doing that you derisk the investment.

So definitely proven winners as opposed to ground-up.

And I think that as you think about the pipeline, the announcement with Sears, that really opens up a whole new avenue of opportunities to reposition nine of the centers that we own here so we are very pleased with that.

I think there will be other rationalizations now that we have been successful on this one, that we will enter into with Sears.

So proven winners.

I think by doing that you derisk the investment.

And pre-leasing obviously.

Thanks, Steve.

Next question.

Christy McElroy, Citi.

It is Michael Bilerman.

Just in terms of the Fashion Outlets and Market East, the project you did with PREIT, in the supplementals you added $100 to $125 million which was the incremental spend above and beyond the $106.8 that you put in.

How should we think about the blended return on the entire capital stack that you expect?

The way to look at the $106 million is we currently are going to be getting even after a lot of the retail has been stripped out of there, there is going to be, our share of the NOI is about $4 million.

There is an office building there that continues to operate, Century 21 continues to operate and that was all part of the $106.

So if you take the $106 at a $4 million or so, $4.5 million you can factor that in and do the math.

It probably takes it down to around an 8% or 8.5%.

But that will be uninterrupted NOI.

That is still just an estimate, Mike.

As we get deeper into it, we will refine, refine, refine that estimate and it could change.

And then I just wanted to come back to the NAV and the Street sell side NAVs are anywhere from $75 to $80.

So there is clearly a disconnect between that and whatever the unsolicited bid was and what room it had in it.

I am curious what you could share with us and I know you are going to go through these joint venture conversations and (inaudible) sale discussions but in the volume of work that Eastdil and Goldman and J.P. Morgan and Deutsche that you spent $13 million on, I'm sure that there's a lot of good nuggets of information that is in there that potentially could shed light and help us, help investors narrow that gap.

And so I'm curious if there is anything else that you could do to shed more light other than -- because I think selling half interest in the mall may be giving you upside, right?

You don't want to do that either and you've talked about that in the past so I'm just curious is there anything else you can sort of divulge or present to the Street?

Sure.

I feel like we already have but I also feel like people haven't heard us.

We gave out a number that is not a GAAP number, not an FFO number but is a number that is what a buyer and a seller would normally focus upon if you were buying or selling this collection of assets and that number was $1.043 billion that Eastdil did present and we presented to our Board.

Eastdil said look, if we were selling these assets, this is the forward 12-month cash flow that we would expect a buyer to pay for.

So if you take that real estate income which again that is a disclosure that you are not going to find it in our supplement, it is not a GAAP number, it is a number that people would use in the buying or selling of property and then you can apply different cap rates to that number.

If you want to apply the cap rate that our unsolicited buyer, bidder apply to our historical NOI of a 4-cap rate, you do the math and that takes you up between $112 and $115 a share.

If you want to take a 4.5% cap rate, it takes you to around $95 a share and then look, one thing I do know is that everybody has an opinion on cap rates and they are entitled to that opinion.

So I think the most important number that we have shared that I'm not sure that people have really, really focused on is the number that a buyer and a seller would expect to use in transacting on this portfolio and then you apply whatever cap rate to that that you want.

Right, and then there is the whole issue of control premium, the development, the redevelopment and all the sorts of things that would roll into perception of value as well.

I would leave you to go ahead and decide what control premium you would add to that, what development value you would add to that.

Again I would reiterate that Eastdil did not have to try and get into projecting out developments that are down the road.

This was very much an as is static type of number and our development pipeline would be incremental to that and people could value that and people would value that but obviously that is more speculative in value.

Thank you, Art.

Jim Sullivan, Cowen Group.

Thanks.

I have a question on Santa Monica Place, Art.

Looking over the productivity and the occupancy changes that you break out in the supplement, clearly over the last year Santa Monica Place has improved the productivity kind of more than the portfolio average and it has had a nice gain in occupancy.

I know you have the theater planned I think in fourth quarter of this year.

I just wonder the third floor has always been kind of the problem at that center.

It is where you have had the biggest kind of changeover in terms of tenants and still seems to be a work in progress.

I wonder if you could just tell us in anticipation of the theater growing in, what the prospects are and whether you have been able to tie up any leases for that space that has been problematic already?

Sure.

Good question.

I'm going to ask Bob Perlmutter to address that because my blood pressure goes up if you ask me about Santa Monica Place.

Jim, this is Bob Perlmutter.

As you pointed out, the third floor has clearly experienced the most turnover at the center.

Not surprising given its orientation toward restaurants which are not always as predictable as apparel or other types of retail.

The key change is the theater and the theater impacts we believe not only this particular center but the entire market which is devoid of a first-class theater presentation.

Getting them up on the third floor will be the key to build momentum around them.

Probably the most important impact we have seen is Cheesecake Factory which as you know also requires a lot of volume and a lot of bodies going through their space.

They have signed a lease for 12,000 feet, they are under construction.

They will open at the same time as the theater.

And from that, we are able to build both traditional restaurant uses which we will probably announce a couple more before the end of the year as well as another entertainment use up there that we hope to announce before the end of the year.

Just to add to that, we did take a chance six years ago with some less creditworthy restaurant type of concepts so the Cheesecake Factory obviously is a credit tenant and the other entertainment use that Bob is referring to I think has significant credit also.

And obviously Cheesecake is pretty discerning in their real estate decisions and they told us they only have one other location that is on the third floor of a shopping center.

So obviously they see great potential both in the Santa Monica market as well as with the theater there.

One other food type question while we are on it, I wonder if you could share with us regarding the Eataly lease in Chicago, do you have percentage rent on that?

We do.

Good.

Thank you.

Thank you.

Linda Tsai, Barclays.

Your sales productivity at $607 per square foot is better than your peers and keeps growing.

Do you have any view of what sales per square foot could look like in two to three years?

Like is this something you spend time forecasting?

If I could predict sales, weather or interest rates I think I would do something other than -- I think my golf game would get better.

I will tell you and not to make light of your question, the tactical moves that we make towards improving our sales is the constant and vigilant process of weeding out the bottom one-third of our portfolio that tends to do sales volumes at significantly lower than our averages.

So I have thrown out numbers before and I'm not fresh on them today.

But if our portfolio is doing $607 a foot, that is probably the result of one-third of our tenants doing $300 a foot and one-third of them doing $600 a foot and another one-third of them doing $1000 a foot.

But a lot of what we do every day is we don't wait for the leases to expire and we are constantly in the process of trying to recycle unproductive tenants out and bring in tenants that we believe will do better than the mall average.

That is how we get our sales to go up.

We don't try (multiple speakers)

-- in that process?

We don't try and influence consumer spending necessarily other than by giving them the merchandise that they want.

We cannot influence people's disposable income but we can influence the productivity by always trying to bring in winners that can produce volumes that are above the mall average.

I'm sorry -- I cut you off on the balance of your question.

I was just asking like with more asset sales, could that potentially hasten the process of increasing sales per square foot faster?

Sure, that happens but that is not the goal of -- the goal of asset dispositions is not to manipulate the average sales per foot.

The goal of the asset dispositions is to identify and look it is largely done but is to identify low growth businesses and to redeploy that capital into high growth businesses.

Thank you.

Thank you very much and we all appreciate you joining us on our call.

We appreciate your input and we are all available to you any time that you want to talk further about anything that we talked about today.

So thank you very much.

That does conclude our conference.

Thank you for your participation.