Macerich Co (MAC) 2015 Q2 法說會逐字稿

Welcome to The Macerich Company second-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 our second-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.

I also want to announce that Macerich will be hosting a property tour of Tysons Corner Center and the new mixed-use development on Thursday morning, October 1. You will have the opportunity to stay at the new Hyatt Regency Tysons Corner Center.

We will be sending out a save-the-date with more details soon.

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.

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

Thank you, Jean.

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

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

It was another very strong quarter for us.

We are now really starting to see the benefit in our operating results from all the major portfolio transformation we have done over the past two years.

This includes the sale of 15 malls and the redeployment of that capital into more productive, faster growing assets.

Leasing spreads were good again this quarter and we saw strong deal volume on 335,000 square feet of shop spaces and the average positive re-leasing spread compared to the expiring rent was 17.5%.

Mall occupancy was again very high at 95.5%, up 10 basis points from a year ago, as well as up 10 basis points sequentially from last quarter.

Temporary occupancy remained relatively flat at 5.3%, up slightly from 5.2% at June 30, 2014.

In light of the very significant retail bankruptcies in the second half of last year and early 2015, these are very good occupancy results.

Average mall store base rents increased to $53.62.

That was up 9% from a year ago.

Looking at FFO for the quarter, we reported this morning FFO at $0.89 per share.

That compared to $0.86 in the second quarter of 2014.

Reflected in FFO was a $1.6 million loss on extinguishment of debt, as well as $11.4 million of expense related to an unsolicited takeover attempt and contested proxy.

Together, they make up $0.08 a share.

Excluding those two items, FFO was $0.97 per share for the quarter, ahead of both our guidance range and consensus estimates.

Same-center NOI during the quarter increased 7.5% compared to the second quarter of last year, and year-to-date same-center NOI growth is up 6.29%.

This increase was driven by increased occupancy, double-digit re-leasing spreads, annual rent increases, and an aggressive operating cost management program put into place this year.

The results through midyear have led us to increase our same-center guidance range assumption up 100 basis points to 5.5% to 6% for the full year.

As a result of the increase in same-center NOI, we saw nice lift in the gross operating margin.

Our gross margin increased to 69.8%, up from 67% in the second quarter of 2014.

Bad debt expense for the quarter was $2 million, slightly higher than last year in the second quarter where we incurred $1.7 million of bad debt expense.

During the quarter, the average interest rate was down to 3.47% compared to 4.11% a year ago, and if you look at the other balance-sheet metrics, debt to market cap at quarter-end was 36.9%.

We had a very healthy interest coverage ratio of 3.7 times.

Debt to EBITDA on a forward basis, 7.2, and average debt maturity of 5.5 years.

And the financing market continues to be strong and we will continue to be in that market.

We have a number of high-quality assets that have been unencumbered recently and are candidates for long-term fixed-rate financing.

They include Fresno Fashion Fair, South Plains Mall, Inland Center, as well as Twenty Ninth Street in Boulder.

In today's press release, as a result of the strong first-half results and outlook for the balance of the year, we bumped and narrowed our FFO guidance range.

We increased to $3.86 to $3.94, and that's up from the prior guidance of $3.83 to $3.93 per share.

Looking at tenant sales, a good quarter there as well.

The portfolio mall tenant sales per foot were up 10% to $623 a foot for the year ended June 30, 2015.

That compared to $567 for the year ended June 30, 2014.

On a same-center basis, sales per foot were $619, and that compared up 6.5% to $581 at June 30, 2014.

Again, during the period, Arizona and California were top regions for us in terms of sales growth.

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

Thanks, Tom.

As Tom indicated, the second-quarter leasing metrics were good.

Leasing spreads for the trailing 12 months were up 17.5%.

Occupancy rose by 10 basis points to 95.5%.

Sales reached $623 a foot.

Bankruptcies moderated significantly from the previous quarter and our signed leases for tenants over 10,000 square feet were strong, with over 450,000 square feet signed during the quarter, including three locations with H&M.

Demand from retailers for the Company's mall locations and outlet venues continues to be positive.

We see retailers seeking to tie in multichannel retail opportunities and further establish their brand identity.

In addition, we see emerging brands and foreign retailers entering the US through store locations, which are typically on the East and West Coast and that aligns with our portfolio.

Tenant bankruptcies during the first quarter provided significant headwinds, with eight national retailers declaring bankruptcy.

These tenants affected 76 stores, containing approximately 247,000 square feet, which generated sales of only $241 per square foot.

Included were larger chains such as RadioShack, Wet Seal, and Cache.

Some of this impact has been mitigated with approximately 46% of the space either leased or approved and in lease documentation.

We have seen and expect to continue to see some retailers with large store fleets reduce their store count.

This is illustrated by Gap's recent announcement to close 175 stores.

Most of these store closures are effectuated through natural lease expirations, as opposed to lease buyouts.

We continue to believe the quality of the Company's portfolio reduces the impact from both bankruptcies and store closures, which we believe will be felt disproportionally in the lower quality centers.

Leasing progress continues to be made at Broadway Plaza, located in Walnut Creek, California.

The initial portion of the first phase will open this November with 22 spaces, containing 45,000 square feet.

We currently have leases executed for 20 of the spaces, or 91%.

The remaining two spaces we expect to sign leases shortly.

Some of the tenants that will be part of the initial phase and new to the center include Lululemon, Kit and Ace, Michael Kors, Madewell, Kiehl's, Lou & Grey, Athleta, and Vince Camuto.

The balance of the first phase will open in May 2016 and contain approximately 150,000 square feet.

We expect to make a more detailed announcement on the tenancy later this year.

Significant resources are also being applied to improving the quality and revenue generation from the common areas of the shopping center.

Sources of revenues include permanent kiosks and seasonal carts, as well as advertising and sponsorships.

As the portfolio has migrated to fewer but more dominant centers, these opportunities will grow and will result in improved operating margins.

Through the second quarter, the number of deals approved has doubled as compared to the previous year.

The majority of this impact will be felt in 2016 when the leases annualize.

An example of this has been the conversion from stationary guest service kiosks into mobile concierges, including text responses to customers' inquiries.

This has not only improved the customer service -- the customer experience, but has also allowed us to convert the former guest kiosks, which are often the best locations within the shopping center, into rent-paying retailers.

Another example of this is at Santa Monica Place, where the new ArcLight theater will present significant advertising opportunities for major motion picture releases.

Lastly, to comment on sales, year to date, sales through the second quarter have reached $623 per square foot.

The increase is attributed to a couple of factors, including the improvement in many of the key tenant sales, including people like Sephora, American Eagle, Foot Locker, Victoria's Secret; secondly to the impact of high-volume retailers, like Apple and Tesla; third, the closure of low-volume stores, such as RadioShack, Wet Seal, and Cache; and, finally, the disposition of lower productivity centers.

In summary, we believe our portfolio offers retailers with key locations in major markets that serve dense trade areas.

These opportunities will increase in importance to omnichannel retailers that have either existing store fleets or are attempting to build store bases.

And with that, I would turn it over to Art.

Thank you, Bob, and thank you, Tom.

We are very pleased with our operating results and with all of our metrics that we have put up here for the first six months, and as you can see by our guidance adjustment, we are very bullish about our future in midterm, as well as longer-term, outlook.

Same-center NOI is significantly above the guidance, even the high end of the guidance, range that we provided at the beginning of the year, and one might ask, what is the new normal?

As I look at it, Tom mentioned that he sees total same-center NOI of around 6% on the portfolio this year.

And we are not in a position yet to give guidance for 2016 and 2017, but we internally are expecting to see same-center NOI growth in that same range of 6% over the next couple of years, also.

And that's largely been put into place as a consequence of re-leasing activity, a consequence of the margin improvement, some of which are yet to come, particularly on the revenue side, but we are very, very bullish on our ability to improve our margins.

It was asked, I know, by one analyst, well, have you really changed your business practices on the expense side to increase your margins?

And the answer is really no.

We're fortunate enough this year to have a couple of major portfolio contracts for maintenance, security, for example, come up for renewal, and given the strength of our portfolio and the quality of the assets and the size of the assets, we were able to negotiate significant reductions there, as well as in other areas.

So we are very pleased about all of our operating metrics and the performance of the Company and the outlook for the future on the leasing side.

On the development side, Bob and Tom both touched on a couple of projects that are very meaningful to us.

We are very happy with where we are on Broadway Plaza.

At Tysons Corner, you are invited to a tour that is coming up here in the near future.

The residential tower is now taking move-ins.

It is currently well leased above schedule.

It is currently 33% leased and we anticipate it being fully leased by this time next year.

As we look at other major projects that are underway, at Scottsdale Fashion Square the Dick's Sporting Goods anchor recently opened and doing very well.

Harkins opens up later this year.

The same combination of additional anchors are going to be opening up later this year at Cerritos and early next year at Cerritos.

Very pleased with the impact that the announcement and the construction and the reality of the ArcLight Cinema has had on the third level of Santa Monica Place, which has actually also helped us to land a signature restaurant that will be coming to the third level of Santa Monica Place, and we expect it will generate a tremendous amount of traffic.

At Green Acres, the leasing on Green Acres Commons, the contiguous space that we're building on the land that we acquired there, is coming along extremely well.

Preleasing activity, both at Fashion Outlets in Philadelphia at the Gallery at Market East, coming along well, as is San Francisco.

The last earnings call, we were on the heels of just announcing our joint venture with Sears on nine assets.

We have been meeting with Sears and the Seritage people.

We are very pleased to have the opportunity to redevelop it and reposition those nine assets, and we anticipate over the next 60 to 90 days that we will be in a position to make more concrete announcements about what's happening within the Sears portfolio with us and the rationalization, but very happy with where we sit there.

And in particular, we could be seeing some pretty significant reconfigurations and re-merchandising and developments available to us at Cerritos and Washington Square in particular, both great centers and centers where we have the ability to recapture over 200,000 square feet from Sears.

And each of them, Sears controls a 20-acre parcel of land that we are looking at various ideas for various expansions.

So very bullish on where we are, pleased with our results year to date, and at this point, we would like to open it up for Q&A.

(Operator Instructions).

Craig Schmidt, Bank of America.

(technical difficulty) positions to fit into recycling capital.

I just wonder how that was lining up for the second half of 2015.

Craig, we only heard half of that question.

Could you give us the whole question again?

Sorry.

Of course.

I know that you're looking toward dispositions for recycling capital and I just wonder how that was lining up for the second half of this year.

We are definitely in conversations to monetize our interest in several assets.

I anticipate that over the next 30 to 60 days, we will be in a position to provide more color on that.

It will predominantly take the form of some new joint ventures on existing assets, and the profile of the assets that are being looked at is really a very broad cross-section of the Company that if you take, for example, one metrics, which would be sales per foot, are virtually identical to the overall performance of the Company as a whole.

So, the pool of assets that we are looking at include one asset that is in our top 10, two assets that are in our group of 11 through 20, a couple of assets that are in a group of 21 through 30, as well as a couple of assets that are in our group of 31 to 40.

So, it's a broad cross-section.

We are in, let's say, the sixth or seventh inning of conversations.

We are very gratified that the initial value indications that these institutional investors who will be taking minority noncontrol positions not only validate the Board's opinion of value of the Company that they reached with the assistance of its advisers back in March, but actually exceed those numbers.

And we are looking forward to being able to announce the results of that asset monetization activity over the next 30 to 60 days.

As we have mentioned in previous calls, we will use those proceeds for whatever we determine at the time is the most appropriate use of proceeds.

Certainly, redeploying the capital either to fund our development expansion pipeline or essentially pre-fund it is something that is always value accretive and always makes sense.

But we have also mentioned in previous calls that, particularly at today's share prices, that the idea of using proceeds from the sale of assets at what we deem to be fair value through joint ventures and using those proceeds to repurchase shares at prices that we think are substantial discounts to the fair value of the Company makes all the sense in the world.

And as we get more clarity on the disposition and the joint venture program, we will be announcing the size and all of the pricing, as well as the use of proceeds, and you can expect that will happen over the next 60 days.

Okay, and then just -- you touched on this briefly, but how soon do you think you can start capturing the 50% of space in your nine stores with the Sears joint venture?

We have the right to recapture the 50% space today, and we are just working closely with Sears, as well as prospective users, to come up with the right re-merchandising plans at the various centers.

So, there will be a lot more clarity on that that will be provided over the next 90 days, but it will be an ongoing process.

In the meantime, we are getting paid a very reasonable return on our investment, north of 6%, while we are taking a look at it and weighing the best alternatives for the reconfiguration and re-merchandising of those locations.

Alexander Goldfarb, Sandler O'Neill.

The first question is on the margin improvement and, Tom, just thinking about the outlook for the balance of the year.

You guys made meaningful progress from first to second quarter.

Should we interpret that there will be more dramatic improvements in the back half of the year or are there some offsets that are coming up that would -- some negatives from just whatever is in the numbers that would cause the back half to be -- to have a little bit of a headwind?

Because it seems like you guys are running a bit ahead of your increased guidance, so just didn't know, one, how to temper our view for margin improvement and, two, if there are any offsets that we should think about in the back half of the year.

Yes, as it relates to the margin, the things that hit very quickly were some of the expense efficiencies that Art mentioned that we picked up and could be implemented very, very quickly.

The revenue side of the improvement takes a little bit longer and has to go through generally the leasing process, which takes a little bit of time.

So, I think the second half may not be as quick as the first half in terms of picking up the improvement.

When we set out to improve the margins, Art indicated that over the next two years we would probably see 400 basis points of improvement, and to date through the second quarter, we are closer to 260 or 270 basis points through two quarters.

So, the expense side came on quicker.

I would expect the balance of that to move a little bit slower.

Second half of the year, we do have a little bit more variability on things like percentage rents and things like that, which are somewhat an estimate and tend to be more back-end weighted.

We have seen a little bit higher than average bad debt expense this year as the result of many of the bankruptcies that Bob mentioned in his comments, so there is a little bit of that, and that creates a little bit of uncertainty in the second half as well.

We expect it to be, obviously, a good second half.

We are guiding to a same-center range of 5.5% to 6%, and that is up fairly significantly from our initial guidance for the year, which was 4.25% to 4.75%.

That's a 150 basis-point pickup.

I would say as we sit here today the bias is probably to the high side of that range we just gave.

Okay.

But obviously, less than the second quarter.

Okay, and then as a follow-up to that, are there any more advisory or takeover proxy costs or has everything now been fully expensed, meaning should we expect anything more later this year or everything has now been expensed relating to the proxy and the solicitation?

To my knowledge, everything has been expensed as of the end of the second quarter.

Michael Mueller, JPMorgan.

I guess following up on that prior question, it looks like the recoveries jumped a little bit in the quarter.

They popped some.

And I was wondering, can you talk a little bit about what drove that?

Yes, and specifically what drove the 100 basis points of increase in the same-store guidance?

Mike, the recoveries on a same-center basis didn't really go up at that level.

I think what you are seeing, if you are comparing it to the second quarter of last year, is we consolidated four fairly large assets that had been unconsolidated assets before that.

And the reason the recovery rate went up is because we were able to make some expense cuts to recoverable areas, like operations, maintenance, security, things like that.

So that's going to cause the recovery rate to go up.

And obviously, we had two pretty good quarters as it relates to same-center NOI growth.

We are coming in at 6.2% for the year, which gives us a little bit more confidence that the balance of the year we are going to be in that new range that we published of 5.5% to 6%, on average.

So, that's what gave us the confidence to increase the guidance for the second half of the year.

Okay, great.

And then, for the second question, just thinking in terms of the earnings guidance increase, were there any offsetting factors that went against the higher same-store NOI guidance?

Yes, we got a slightly higher bad debt expense, for example, which I alluded to a minute ago.

That has been bumped.

We also tightened the range a little bit, so we took a little bit of uncertainty out of that, as well.

I mean, we bumped this now $0.05 from our initial guidance, which is roughly equivalent to the improvement in the same-center NOI that we have changed.

Okay, great.

Thank you.

Todd Thomas, KeyBanc Capital Markets.

Just a follow-up on the guidance revision.

I just wanted to dig in a little bit there.

Can you just discuss why the guidance was actually up $0.02 at the midpoint?

The increase in same-store NOI growth, I guess, for the full year alone is more than $0.02 a share, plus you added the Sears JV to the forecast, so you mentioned the bad debt expense.

That's a little higher, but that doesn't sound like it is as significant.

I am just trying to understand what the offset might have been.

Todd, a 150 basis-point improvement in same-center NOI is about $0.06 of improvement.

We picked part of that up last quarter, because we bumped last quarter as well and we also bumped the same-center range last quarter, and we picked up another $0.02 here.

So we are halfway through the year.

We've got decent visibility for the rest of the year, but more than 50% of our revenues and NOI comes in the second half, particularly the fourth quarter where you have got a lot of temporary leasing and you have also got the percentage rent, the bulk of the percentage rent gets [billed].

So, there is still some uncertainty in those numbers.

We are comfortable bumping it and narrowing the range, and we will readdress it again after next quarter.

Okay, and then the management company loss was lower sequentially by almost $7 million.

I think that is consistent largely with what -- I think you mentioned last quarter, Tom, the bonus payments and some other items that hit in the first quarter.

Are these revenue and expenses for the management company's operations, is that a fairly good run rate to think about throughout the balance of the year?

Second quarter is a good run rate.

As you mentioned, there were some nonrecurring things in the first quarter that made that unusually high in terms of expense.

Okay.

All right, thank you.

Christy McElroy, Citibank.

Just following up on the potential asset sales, as you think about the sources and uses of capital, are stock buybacks contingent on executing on asset sales?

And what level of proceeds should we be thinking about, given everything that you have in the works today?

We think that, from our viewpoint, funding of stock buyback with equity that comes from either the disposition of all of an asset or the disposition of a part of an asset through a joint venture is the most logical source of capital.

We don't really believe in the idea of borrowing money to buy back stock.

So, once the joint ventures are committed and allocated and legally under contract, that would be the time that we would anticipate that if there is going to be a stock buyback, which I think there is a strong probability that that is going to be -- make a lot of sense to us, that would be the time that we would think about such a thing.

We're looking at a range of different joint ventures, but the idea that we would generate at least $1.5 billion or maybe even $2 billion of new cash from the joint venture activities is -- that could be used for whatever we deem at that point in time to be the most rational use of proceeds is certainly not out of the question.

So it's a meaningful asset monetization, a very meaningful validation of our view on the value of our assets.

Again, it's a very broad cross-section of assets and we are not legally committed to the joint ventures at this point in time, so it wouldn't be appropriate in our mind to address or to consider implementing a stock buyback until we have the certainty of legal commitments from the investors.

Okay, and then just a follow-up on the same-store NOI forecast.

Given the increase in your 2015 same-store forecast, I'm just thinking about your prior 2016 total NOI forecast of $1.04 billion, given the increase in your expectations for 2015, how that has changed?

We haven't given any additional guidance on 2016 yet, Christy.

It would be premature to do that at this point.

But no update on that $1.04 billion number?

No.

Thank you.

Steve Sakwa, Evercore ISI.

Art, I just wanted to see if you could talk a little bit -- if you could talk about the redevelopment program and expansions, and just as you look out over the next 12 to 24 months, what other projects, and if you could frame out for us size and scope for some of those things.

I am not in a position to make any incremental announcements that are not in our supplement filing right now.

But clearly, there are opportunities within the nine joint ventures that we have with Seritage for some incremental investment opportunities there.

We are constantly looking at many different expansion and redevelopment scenarios at quite a few of our properties.

And our policy is that when we believe that we have a clear vision, that it makes it into the shadow pipeline, and when we believe that we have all of our entitlements and that we are virtually ready to break ground, it makes it into the in-process pipeline.

So I am not going to, at this point, speculate beyond what is in our supplemental disclosure, but there are plenty of projects that are being reviewed that are not in the supplemental disclosure, and as they pass those hurdles of projects that we want to pursue, they will be disclosed.

There is definitely more to come, definitely more to come.

Okay, and then, I guess, just on the outlet business.

Maybe you can't speak to this either, but just in terms of potential new projects as you look around the country, how many more do you think you could do over the next couple years?

Our focus right now is on the execution of our project at San Francisco and Philadelphia.

We got a lot of wood to cut there, but we are very bullish on each of them, so those are definitely in the pipeline.

And beyond that, I would say the pool is limited.

It would be a competitive disadvantage, in our view, for us to put a number on something, but it is a limited pool.

We have always said that if we, at the end of the day, owned three, four, five, six, seven, eight of these after five or seven years of being in that business, given our requirements that they be dominant centers, that we think that would be a great accomplishment.

And so, I would not forecast that we're going to be announcing any new ones anytime soon, other than those that are currently in our disclosure, and those are both great projects and we are very happy to have those opportunities.

I did allude to the possibility in a previous call that we could be potentially looking at an expansion of Chicago, Fashion Outlets of Chicago somewhere down the road, but that's speculative at this point in time, and it is still possible, but speculative.

Okay, thank you.

Vincent Chao, Deutsche Bank.

Just wondering if you could maybe provide some more color on the sales trends that you are seeing, which seem to be accelerating, the tenant sales growth in your portfolio.

It seems to be a little bit at odds with some of the macro sales data we see, which is slowing.

But just wondering if maybe you could provide some color on categories you are seeing the most strength from and also maybe more recent trends from the quarter as opposed to on a trailing 12-month basis.

I think from a category standpoint, some of the stronger categories have been home furnishings, jewelry, athletic apparel, and athletic footwear.

Those would be some of the strongest.

Regionally, the West Coast and Arizona has led the sales increases.

As I mentioned, what we see principally in terms of sales growth is many of our core tenants that occupied space in almost every one of our centers -- I think I mentioned some, like Sephora and Victoria's Secret and Foot Locker, they have had very good sales trends.

Kay Jewelers is another one that has had good sales trends.

And then, you do have the impact of the unique high-volume retailers, like Apple and Tesla.

I think the weakest part of the market has been the apparel, and that's -- that is important for the malls because they do occupy a significant portion of the mall space and that has probably been the softest part of the market.

And just to follow onto that, you could easily have a macro environment where ICSC or whatever other resource that tracks retail sales, they could come out and say, hey, retail sales are flat every quarter for the next three years and it wouldn't be out of the question that even in that environment you would see strong sales increases within a portfolio of well-located regional malls.

And the source of that is essentially what we do every day, which is constantly on the lookout for opportunities to replace lower-producing tenants with higher-producing tenants.

That's a big driver of sales performance increases in a well-located mall portfolio.

Okay, thanks.

Just as a follow-up, and that last comment maybe addresses this question as well, but just trying to understand, so the rising sales growth environment seems to suggest an improving environment for the retailers in your malls, but the bad debt expenses is going up, so maybe that's just part of that churning process, but curious if you had some comments on that.

Yes, that is churning.

When you look at some of the retailers that filed bankruptcy and went out, those were some fairly stale concepts.

I don't think it was a surprise to anybody to see RadioShack file and close stores, and the same way with Wet Seal.

They had been through the process a number of times.

So, it's out with the old tired concepts and in with the new concepts, which, by the way, the new concepts are taking a lot more space than the failed concepts are giving back.

Bad debt from dying concepts is really a positive canary in the coal mine of good things to come, because it is a precursor of the replacement of tenants that are doing well below the mall average with tenants that are doing -- we always seek to bring in new tenants that will do better than the mall average, but even if you bring in tenants that are doing the mall average, you're going to increase the overall sales of the portfolio.

So, bad debt from low-producing tenants, which that's what we're looking at here and it's almost always what you're looking at, is really a precursor of good things to come in a well-located mall portfolio, which is what we own.

Okay, thank you.

Paul Morgan, Canaccord Genuity.

The same-store line -- numbers that you gave, is one way to think of it that, as we look into the rest of this year, it has been largely an expense story in terms of some of the initiatives you talked about earlier?

And then, as you said, you can do 6%, you think, maybe in 2016 and 2017 as well.

As the expense savings anniversary, would we -- to get to that number going forward, is that when revenue initiatives will start to kick in?

Is that one way to look at it?

Well, that's certainly part of it.

If you look at this quarter, isolate this quarter for a second, we had about $4 million of savings on the expense side on a same-center basis.

So that equates to about 180 basis points or so on the same-center number.

So, that brings you down into the 5% range, which is a healthy growth rate, and that's before some of these new assumptions come in on the leasing side and the other ancillary income.

So, if you look at this quarter, you can certainly see the impact of the expenses.

But that still leaves us at a fairly high level of same-center NOI and that's before some of these new initiatives kick in.

Okay, and then my other question, just in terms of the joint venture, so could you just help give some color -- you have talked about over the past you pursue the advantages of buying out JV partners in some of your top assets, and this would seem to be going the other way.

Obviously, the buyback is a potentially strong use of proceeds, but is that just it, to provide a data point evaluation and potentially buy back the stock?

Or is there -- are there other reasons?

Well, there is certainly any of the new or expansion of existing relationships or the addition of new partners, we are clearly having strategic conversations with them and seeking to do business with people that see the world the way we see the world.

But coming out of, say, March, we had a tremendous amount of interaction with our shareholder base, and our shareholder base really communicated to us that the only way that they felt that we were going to -- that they were going to be able to update their thinking to be more in line with our thinking, in terms of the NAV of the Company, was to monetize some assets.

If there were not such a large discrepancy between what we perceive the value of the Company to be and where it is currently trading, our appetite to pursue those monetizations would be diminished a little bit.

But given the current very large discrepancy between where our stock is trading and where we see the value of our Company, and in response to really a request from our shareholders that -- a show me the money request, that's why we have pursued the monetizations and we think we have some very, very attractive use of proceeds.

So we are not doing it for optics only.

We just think it makes all the sense in the world.

And we are clearly not taking the cream of the crop and using that to then average down in terms of the quality of the Company.

We're taking a very broad cross-section of quality that is representative of the Company overall, and we are convinced that when we announce that deal, when we announce the valuations attendant to that deal, it will give people a lot more visibility and confidence into our view of the value of our assets and help them to update their own thinking.

And again, at this point in time, compared to a few months ago, that we have a really attractive use of proceeds.

So you are structuring it intentionally so that the portfolio reflects -- is reflective of the quality of the rest of your portfolio?

Yes, we don't want it to look like -- we don't want people to be able to sit there and look at it and say, oh, well, that is not really much of a litmus because -- I will use an extreme example -- you did joint ventures on your top three assets in the Company and you did it at a sub 4 cap rate.

And they will say, well, yes, of course it is worth a sub 4 cap rate, but what does it mean for everything else?

So we really decided that, look, we would take a very broad cross-section of assets that are really -- when you take a look and if you're going to use sales per foot as the measure to compare that pool of assets to the Company, the sales per foot of the assets that we are looking at doing these joint ventures on is extremely similar to our average sales per foot that is in place for the Company as a whole today.

And I mentioned in my opening comments where the assets sat.

Given the way that we rank our properties, you can see that it is a broad cross-section that hopefully will give people -- and it is a sizable cross-section in terms of dollars.

It will give people hopefully an updated data point, which is really one of the challenges that the mall industry has is that you have very few data points to look at for people to stay up to date on where the private market is valuing these assets.

And even with these joint ventures, for example, you are still not getting a true sense of the value.

It is still less than the true value because it is a minority position that has no control.

And the control position or 100% position of a great mall would always trade for more than what a minority position would trade for.

Great, thanks.

Rich Moore, RBC Capital Markets.

The first thing is the line of credit, Tom, has a balance of $767 million, I think it is.

That is down from $852 million last quarter, but you added the Lakewood mortgage, so that should have shaved some $400 million off.

And I look at that now, that $767 million, and I'd say are you going to be able to reduce that further?

Is that part of the use of proceeds from the joint venture sale, that kind of thing, or are we going to run more in the mid-$700 million range going forward?

Rich, you may have missed this.

I made a comment earlier in my comments that we currently have four pretty significant unencumbered assets -- Fresno Fashion Fair, South Plains, Inland, Twenty Ninth Street, for example, and there is others, but those alone are $800 million of refinancing proceeds at a comfortable 50% or so LTV.

And the anticipation is that we will gradually, as market conditions allow, finance those and that capital can be used to pay down the line of credit.

We really don't have a lot of floating-rate debt on the books, so we haven't been in a huge hurry, but that's financing out there, and Fresno, we have been in the market getting bids and the others would finance out pretty quickly, particularly in the CMBS market, so that's the plan there, at least at the moment.

Okay, so just as those mortgages come due, you will get higher use of proceeds, higher proceeds, and pay down some of the line?

Right, right.

Okay, and then the other thing is other income, guys, was also up pretty strongly this quarter and I'm curious.

I am thinking about it sequentially.

And I'm wondering if that sort of trend continues as well and is part of the sustained margin improvement.

Well, we certainly hope so, Rich.

That tends to be parking revenues, advertising revenues, things like that.

And it was up a bit and that's a goal is to continue to push those type of ancillary revenues that drop right to the bottom line and improve the margin.

Okay, so those could continue as well?

We certainly plan on that.

Great.

Okay, thank you, guys.

Tayo Okusanya, Jefferies.

Great quarter and really nice to see.

Just -- I may have missed this earlier on, but was there any more update on Candlestick and The Gallery in particular?

Just I made some general comments that preleasing activity is going on very well and we are very bullish on both of them.

On both of the products, okay.

Great, thank you.

Haendel St.

Juste, Morgan Stanley.

So, Art, a question for you.

I guess at our recent NAREIT meeting, you mentioned that you've resumed marketing your bottom 10 or so lower-tier malls.

So I wanted to clarify, first, that those malls were separate from the JV conversation or JV comments you were making earlier.

And as part of that, can you give us a sense of the status of that sales process, and any color on pricing or any other detail you would be comfortable providing?

Yes, we did get a lot of inward inquiries about those assets, but, unfortunately, a lot of those buyers are essentially trying to -- instead of just making money, they are trying to improve their optics and so they are trying to cherry-pick things.

And I still see us over the next five years not owning our bottom 10 assets, but over the next six months, my suspicion is that we might sell one of them.

And we will see where that goes.

The pricing on that particular deal is, I think, in the low 6s or something like that in terms of cap rate, but we will see.

Okay, fair enough.

And I guess (multiple speakers)

We have a very high -- Haendel, just to clarify a little bit -- look, we have an appetite to give people clarity on the value of the Company, and in our view if you can sell a joint venture interest at a higher multiple than you can buy back stock, that's a no-brainer.

And it is a very appropriate use of capital, especially if it is a broad cross-section.

And we have absolute certainty and confidence that we will execute on the joint venture side.

Dispositions, by their very nature, I am just an agnostic and I believe them when they close, and otherwise I just don't even try and predict.

So, we really decided that while that is a source of capital for us, it really only represents 5% or 6% of our NOI, so it really doesn't give you any guidance to the value of the Company if we sold all 10 of them.

And given that our portfolio transformation is really already complete with 95% of our NOI coming from fortress assets, there is no compelling reason to do it there either.

The whole idea of the reverse leverage where some of your weaker centers hurt your better centers is behind us now, and our better centers are no longer being homogenized down, which can tend to happen, and that is one of the reasons that you continue to see these double-digit re-leasing spreads that Bob and we have been reporting to you.

So, that has been the thinking.

Okay, listen, I certainly appreciate the additional color there, and as well as the thought process on the JVs and the expectation of higher values, but have you thought of or perhaps how would you respond to those who might view this potentially as a potential form of a takeover defense?

Curious on how that went into your thought process here on the JVs.

Well, I have always maintained that the best defense against a takeover is to outperform your peers.

And if it falls into the bucket of giving us the ability to outperform folks, then I guess you could call it that, but it's just good business.

So if good business is considered to be a deterrent to somebody wanting to buy your company, then you could consider it that.

It's just good business.

Ki Bin Kim, SunTrust.

So I realize value is a lot of times in [inaudible] in the eye of the beholder and even consensus estimates for NAV are somewhat all over the place.

But I am just a little surprised that you are intending to do a stock buyback, and I understand if you're going to sell assets at $623 of sales productivity at a lower cap rate and buy back stock.

I understand that math, but when I look at consensus NAV or even my NAV, as I say, consensus is at $78.

And some of those estimates include a quasi takeout premium.

It just doesn't seem like the best use of capital.

Maybe not a bad use of capital, but maybe not the best thing to do, especially with your development pipeline that is pretty big and you have a serious joint venture to fund.

So just curious to know, maybe it comes down to what your NAV is versus what I think your NAV is, but why buy back stock?

And why is that a top two or three best uses of capital?

Well, we haven't announced that that is what we are doing, but we clearly have indicated to you that it is on the table.

And we have given you a time frame that you could expect that it could be announced.

As to if we believe, if we believe that our NAV were $78 a share, this Company would no longer be in existence.

It would have been sold.

We clearly don't believe that, and I empathize with those that try and provide -- that try and calculate NAV on companies like ours, because other than ourselves who gives you sales per foot by property and NOIs by every 10 properties so you have got really a pretty darn -- you got 95% of the roadmap that you need to get to the NAVs that we view the Company to be worth, you still have the problem, but you don't have a lot of transactions in the space, because these assets are so dear.

And so, I empathize with those that struggle with trying to come up with NAVs, and we're going to try and help you to rethink your view on NAVs by showing you some transactions that involve a substantial pool of assets that are a broad cross-section that are at substantially lower cap rates than what you all are using to get to your collective consensus of $78.

And that's the best I can do.

And that comes from meeting with our shareholders, okay?

So in meeting with our shareholders, we asked them in terms of our strategy going forward, and there was clearly a view that this strategy is something that made sense and that actually transacting on some joint -- on some dispositions or joint ventures was more meaningful than even, for example, posting a third-party's opinion of NAV of the Company, which people could believe or not believe.

But real transactions speak for themselves, and so this really comes from an outreach program to shareholders that control well over 90% of our Company and it was a consensus view that that was something that our shareholders wanted to see.

And in some cases, it was instigated by them.

In other cases, they concurred with the idea.

Ladies and gentlemen, at this time this does conclude our question-and-answer session.

I would now like to turn the call back over to our speakers for any closing and additional remarks.

Thank you for joining us.

Again, we are pleased with our results.

We are not sitting back and going to rest on our laurels.

We are very bullish in our ability here to continue to put up outsized growth over the next several years, both from an operational viewpoint, as well as from a value-creation viewpoint through our development and redevelopment pipeline that is currently there and as it gets expanded.

So, look forward to speaking with you, seeing you, and thank you again for joining us today.

Thank you.

Ladies and gentlemen, at this time this does conclude today's presentation and we appreciate everyone's participation.