Macerich Co (MAC) 2016 Q1 法說會逐字稿

Welcome to the Macerich Company first-quarter 2016 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 on our first-quarter 2016 earnings call.

During the course of this called management may make certain statements that may be deemed forward-looking within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially due to a variety of risks, uncertainties and other factors.

We refer you to today's press release and our SEC filings for a detailed discussion of forward-looking statements.

Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measure are included in the earnings release and supplemental filed on Form 8-K with the SEC which are posted in the Investors section of the Company's website at www.macerich.com.

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

If we run out of time and you still have questions please do not hesitate to give us a call.

The first quarter reflected continued strong operating results, as evidenced by the strength of most of our portfolios key operating metrics.

We continue to execute on our previously announced $1.2 billion share repurchase program and also recently completed the sale of a non-core mall.

We will talk about those in greater detail later on the call.

For the quarter FFO was $0.87 compared to $0.79 for the quarter ended March 31 of 2015.

Negatively impacting the quarterly FFO results was $3.5 million of loss on early extinguishment of debt on the prepayment of the Arrowhead Towne Center loan in January.

Other things impacting the quarter were same center NOI which increased by 7.5% compared to the first quarter of 2015.

We made significant expense cuts and initiated cost savings programs that started in the second quarter of 2015.

So about a third of the same center NOI growth this quarter comes from the impact of those expense cuts compared to the first quarter of last year.

The balance of the growth was driven by double-digit re-leasing spreads, annual rent increases and aggressive operating cost management.

Same center NOI growth for the balance of the year will obviously be less than the first quarter as we hit comp quarters that already had the impact of the expense cuts.

Our estimate for the full year remains in the 4.5% to 5% range.

Gross operating margin at the centers for the quarter improved to 68.6% from 66.6% in the first quarter of last year.

Bad debt expense was relatively modest at $1.2 million down from $1.6 million in the first quarter of last year.

As a result of a very attractive financing market, the average interest rate continues to be very low at 3.62%, although up slightly from 3.49% a year ago.

The balance sheet continues to be in great shape.

At quarter end debt to market cap was 35.8%, the interest coverage ratio was a very healthy 3.5 times, debt to EBITDA on a forward basis 7.2 times, and the average debt maturity 6.14 years.

The financing market for high-quality regional malls remains very good.

In addition to closing the previously announced Arrowhead Towne Center loan in January, we have closed or committed on two other life company loans and we are in the market with a third.

Subsequent to our purchase of Country Club Plaza we put a $320 million loan in place that is 10 years fixed with an interest rate of 3.85%.

We also committed to a $375 million loan at The Shops at North Bridge, that is a 12-year fixed rate loan.

The rate is locked at 3.68% and we should close that loan in the next few weeks.

That refi will pay off the existing loan which is $189 million with an interest rate of 7.5%.

So are effectively doubling the size of the loan and cut the interest rate in half.

We are also currently in the market for financing on Corte Madera.

And in addition to very attractive life company bids, we are also seeing some very competitive CMBS bids and that is for the first time in the past six months or so.

And again, these are A quality malls; I am not sure that the CMBS market exists for all property types and qualities, but certainly for A quality malls it seems to be coming back.

Looking at the stock repurchase program, in mid April, as part of the previously announced $1.2 billion stock buyback approval, we entered into another accelerated stock repurchase program.

We received 4.2 million shares when we started that program on February 18 and the balance of the shares were to be delivered at the conclusion of that program.

On April 19th we completed the program and had an average share price to Macerich of $78.69.

We received another 861,000 shares that have been retired.

The total shares retired under both of the accelerated stock repurchase programs we have completed is now 10.2 million at an average share price of $78.48.

Looking now at the FFO guidance, in our press release we reaffirmed our original guidance of $4.05 to $4.15.

There is only one assumption change and that is in our initial guidance we provided for the previously announced JV interest sales but we did not include any impact of non-core asset sales.

In April, however, we did sell Capitola Mall.

Capitola was a non-core asset for us doing $350 a foot in sales and that was sold for $93 million.

The Capitola sale will be dilutive to 2016 FFO by approximately $0.03 a share and that has now been factored into the guidance.

So another way to look at the initial guidance is that it has been raised by $0.03.

Other assumptions have remained unchanged and are detailed on page 8 of our 8-K supplement that was filed yesterday afternoon.

And just to remind you that our business, in terms of FFO and NOI, is seasonal and the quarterly FFO split we expect is for the remainder of the year 23% of the yearly total in the second quarter, 26% in the third quarter and 30% in the fourth quarter.

And with that I will turn it over to Bob to discuss the tenant environment.

Thanks, Tom.

Leasing activity during the first quarter remains strong.

This reflects the high-quality nature of the Company's shopping centers.

I will start with occupancy.

Occupancy at the end of the first quarter was 95.1%.

This represents a 30 basis point year-over-year decline.

With the sale of Capitola Mall it has been excluded from the calculation while Fashion Outlets of Niagara Falls and SouthPark were included in the calculations having moved from the development portfolio into the stabilized portfolio.

These three changes negatively impacted occupancy by 40 basis points.

Absent these portfolio changes the occupancy level on a year-over-year basis increased by 10 basis points.

Temporary occupancy at the end of the first quarter was 5.5%.

Leasing spreads.

Our leasing spreads increased to 15.4% from 14.2% during the previous quarter.

These spreads indicate continued strong demand for space in the portfolio.

As we have seen in previous quarters, our leasing spreads were strongest in the East and West Coast centers.

Average rent for lease signed during the trailing 12-month period was $57.44 per square foot.

During the first quarter a total of 733,000 square feet of the leases were signed.

The square footage of leases signed under 10,000 square feet was 6% higher than the first quarter of 2015.

Average term of the leases signed in the first quarter was 5.8 years.

Portfolio sales were $625 per square foot.

This represents a 3% increase on a year-over-year basis.

The impact of the previously mentioned portfolio changes reduced sales by $13 per square foot.

Comparable center sales increased 4.6% on a year-over-year basis.

And again, sales increases were strongest in the West Coast centers.

Categories that did well during the first quarter included beauty and cosmetics, athletic footwear and athletic apparel, jewelry and restaurants.

Bankruptcies.

As discussed on previous calls we approached 2016 cautiously.

During the first quarter the level of bankruptcies and store closures was low.

Subsequent to the first quarter PacSun entered bankruptcy.

Our exposure to PacSun has been reduced significantly since 2012 through dispositions and re-tenanting.

In 2012 there were 36 PacSun stores in our portfolio compared to 28 stores today.

While too early to determine conclusively, we anticipate PacSun will attempt to reorganize with a smaller store count.

PacSun represents approximately one-half of 1% of the Company' gross rents with average sales of $333 per square foot.

This is approximately half of the portfolio sales average.

Their base rent is $47 per square foot which is $9 per square foot or 16% lower than the average base rent in place at the centers where PacSun is located.

The statistics for Aeropostale are similar.

Since 2012 we have reduced the number of stores with Aeropostale from 44 to 27.

They represent approximately one-half of 1% of the Company's gross rents.

Sales are higher at $500 per square foot.

We anticipate Aeropostale will reorganize with a smaller store count.

Like expirations, we have witnessed that bankruptcies and store closures often present opportunities to improve the merchandise mix, increase sales productivity and generate higher rental income.

While there is a short-term impact in terms of lost rent and re-tenanting costs, long-term the re-leasing of these spaces puts the center in a stronger position and increases net income.

Development.

Leasing at the development projects remains on track and is nearing completion at two of the centers.

At Broadway Plaza we have signed leases for 89% of the expansion space with another 5% approved and in documentation.

We built a strong merchandise mix featuring a number of the leading lifestyle retailers and flagship stores to complement our existing anchors of Nordstrom, Macy's and Neiman Marcus.

The next group of new retailers will begin opening this June.

Upon completion Broadway Plaza will finally present sufficient specialty store space to serve this unique trade area.

You will notice in this quarter's supplement the projected cost for Broadway Plaza was increased to $305 million.

The increased costs, our share of which is $17.5 million, were the result of market conditions for construction in San Francisco, unforeseen site conditions and increased scope for the project which was generated from retailer demand.

At an 8% stabilized return, the value from creation from this development is substantial given the quality of the asset.

At Green Acres Commons we have signed leases for 90% of the center with another 2% approved and in documentation.

You will also notice in this quarterly supplement the projected return on this project was increased by 100 basis points from 10% to 11%.

This increase in the stabilized return is the result of higher than budgeted rental rates achieved during the lease up.

Finally, leasing and construction are well underway for the Fashion Outlets of Philadelphia.

We are pleased with the reception from the retail community to date and anticipate strong interest from retailers at the upcoming ICSC the show in Las Vegas.

So looking forward we expect retailer demand for the centers in our portfolio to remain high.

Rental rates on renewal leases, which represent almost two-thirds of our annual activity remain strong.

Many of our core tenants, including categories such as cosmetics, health and beauty, intimate apparel, athletic footwear, optical and jewelry are growing their core brands and developing new concepts.

There is increasing activity from established e-tailers seeking a physical presence in our centers.

Foreign retailers are entering and expanding their existing store base in the U.S. And finally, larger format retailers continue to see expansion within the mall environment.

So while we know not all retail chains will succeed, we are certain that dominant retail locations will.

Now I would like to turn it over to Art.

Thanks, Bob, thanks, Tom, and welcome to the call.

As you can tell from reading our earnings release, we had a terrific start to the year on all fronts -- financial fronts, the operating results, re-leasing and leasing activity as well as the further progression of our development pipeline.

All are poised to deliver great growth for the year as well as incremental value for all of our shareholders.

I want to talk a little bit about capital allocation strategies, it is something that has been top of mind and many analyst minds lately, especially given the substantial disparity between the NAVs of most REITs and the private market valuations and the discounts that REITs are trading at.

Textbook theory would have you in situations like this sell at higher multiples into the private markets and use that capital to buy back your stock in the public markets at lower multiples.

And that is exactly what Macerich has done.

As you remember, we did our joint ventures that were announced about eight or nine months ago and that have just recently closed in this quarter.

We sold about a 45% passive interest in several assets, eight assets, that represented about 20% of the gross asset value of the Company.

So we sold an interest in around 9% to 10% of our view of the gross asset value of the Company at private market multiples, which are significantly higher than public market multiples.

We took that capital and we announced a buyback program that would have us buying back approximately 10% of our stock in the public markets at significantly lower multiples all with an idea towards capturing that differential.

So we think that in a very meaningful way that we have pursued a capital allocation strategy that makes all the sense in the world at this point in the cycle and at this point in time for Macerich.

A collateral issue and related issue is portfolio management.

We have indicated that we will continue to selectively prune our portfolio and in this quarter we were successful in announcing the sale of Capitola Mall.

Capitola was a center that averaged mid-$300 per foot, it was a very good property but it had not shown the types of growth characteristics that some of our more urban assets have shown for us.

And when you combine the sale of Capitola Mall and Panorama Mall about six months ago, we sold two centers that average in the low $300 a foot for cap rates that were in the low 6s to the mid-6s.

We raised about $200 million of equity from that.

But if you want to think about it from a portfolio management viewpoint, in our mind that was the capital that we redeployed into the purchase of the 50% interest in Country Club Plaza, which is a center that obviously has much greater growth characteristics than the centers we sold.

And from a sales productivity viewpoint, does more than double the sales per foot of the two centers that we sold.

Going forward from a productivity viewpoint and a disposition viewpoint, we will continue to prune our portfolio.

We will use that lower bucket of assets to selectively and opportunistically raise capital going forward.

And we see the use of that capital really to be our source of capital or one of our sources of capital to fund our highly profitable redevelopment and development pipeline.

I want to look to comment on our view of retail demand and the convergence of technology and real estate which we think is something that is clearly going to happen this year.

Our view on retail demand as we have gotten into the year has only gotten to be more optimistic.

Early on in the year when we were very forthright about our view on tenant bankruptcies some folks viewed that as being cautious.

I would say it was really more forthright.

Over the past several months we have spent a lot of time talking to digital companies, companies that currently do not do business in our malls, and we have found that their appetite to experiment with stores at our malls is extremely high.

It is not about online versus off-line anymore in the shopper's mind, it is all about the quality of the brand.

And if you have a brand that shoppers want then shoppers do expect to be able to access that brand anywhere, anytime and in multiple manners through an omni-channel opportunity.

Retailers continue to understand the importance between e-commerce, bricks and mortar and brand awareness.

Rarely do we see retailers not making these three concepts together as they build out their retail platform.

There is increasing activity from established e-tailers seeking a physical presence.

While small in terms of magnitude within the portfolio the opportunity for growth is high, especially in better quality urban shopping centers.

We believe that stores located in centers that serve densely populated trade areas will benefit the most and increase in importance as there is this convergence of tech and brick and mortar.

A recently published study indicated that within a 30-minute drive time of Macerich malls there is about on average 1.9 million people that reside.

That is about 50% greater than the average for the broader peer group.

That is by design.

We set out by design several years ago to concentrate on urban densely populated trade areas.

We did this for many reasons, one of them has to do with just the fundamentals of supply and demand.

If you have a property that is in an urban location it is very hard for competition to come in and impact you.

And most all of our urban locations are must-have retail locations.

Retailers and e-tailers, as they think about it, they look at the dense population that we have around our shopping centers and they see our shopping centers as being their vehicle to serve the last mile to their ultimate shopper to the consumer.

We are thinking about lots of opportunities to give access to our shopping centers for smaller digital retailers.

And we believe after meeting with many of them over the past several months, and devoting a tremendous amount of time and attention to this, that our very high barrier to entry shopping centers are also greatly in demand from the digital retailers of the world.

Now it is up to us to lower the barriers for them to figure out ways to do business with us and to reduce the friction that is involved in them opening a store.

And we have several initiatives that are underway that will be developed and discussed further as the year goes on.

And with that, I would like to open it up for questions.

And, operator, please go ahead.

(Operator Instructions).

Jeff Donnelly, Wells Fargo.

Art, thank you very much for the color.

Maybe just a first question if I could on 2016 guidance for Tom.

I just wanted to clarify; you said you felt that net of the Capitola sale that you had raised your outlook by $0.03.

I am just curious, is that because of the positive performance you had in Q1 or is that because your outlook for future quarters is improving?

Jeff, it was a result of a strong quarter in the first quarter.

Part of it may be timing differences such as recognition of lease termination revenue.

We tend to back end weight those through the year.

We had about $3.4 million that came in the first quarter.

So, for us to hold our range where it was originally, even with the $0.03 of dilution, was because of the positive result in the first quarter.

That's helpful.

And maybe just a follow-up question for you, Art.

I am not sure if you will be able to talk about it, but I saw in the proxy that one of the areas that you received kudos for in 2015 was a comprehensive succession plan was undertaken.

Are there any highlights from that you are able to share with folks on the call or --?

Really it is something that is pervasive throughout the organization.

So there were about a dozen people within the organization that received new opportunities in an upwardly mobile manner.

We have a lot of those individuals here on the call with us, Bob Perlmutter, who was promoted to be our Chief Operating Officer.

But across the board, Eric Salo was promoted to be our EVP of Strategic Initiatives in addition to mall operations.

We have a new head of leasing.

There were about a dozen people overall in all departments that received new responsibilities.

And this is just reflective of the deep bench that we have as well as a commitment to provide that kind of mobility to our very talented team.

Thanks, guys.

Vincent Chao, Deutsche Bank.

I just want to go back to the comment (multiple speakers) all the discussions you are having with tenants that are currently online retailers that are looking to get into your stores and thinking about the stores as part of a brand awareness type of campaign.

Do you anticipate -- or was there any discussion about how the leasing economics might change at the mall as a result of sort of this integration of online and off-line businesses?

Yes, it is all being -- first of all, there is going to be no rule of thumb because if there is then we are going to continue to have -- be difficult to approach.

So we are going to have to be just as creative as the people that we are trying to do business with.

So, in the beginning they will be shorter lease terms, there will be pop-up stores that will be initiated.

There will be some rents that we think are really being paid for out of the marketing budget of the retailer where they are looking to try and extend their brand awareness.

It will be a much more creative and approachable lease structure with a hope and a view that as these retailers pan out that they will essentially have become incubated and then they will be migrated into the more traditional long-term relationship that we have with the vast majority of our tenants.

But we see great opportunity here.

And the thing that I would say is that my personal view on this is significantly more positive today than it was three months ago.

And that is really a function of me personally, along with Eric, who I mentioned was appointed to be head of our strategic initiatives, spending a significant amount of time with early-stage founders of etail concepts, people that are somewhere probably between an Angel series and a Series A financing, they're just beginning to think about opening a store, they have had some success online, they have a brand that people seem to like a lot.

And when you meet with these folks, you go into it in the beginning and I said I wonder if this is going to be a difficult conversation to convince them that they should be in this old school shopping mall.

It is just the opposite.

There has been almost 100% success and conversion rate in the conversations.

Their appetite to be in the malls is just without question.

They realize that these are the premier locations to give awareness to their brand, to get access to the customers.

But the truth of the matter is that while our malls are high barrier to entry, at times the way we do business is also high barrier.

So we have to become a little more flexible and a little more outward reaching and customer facing to the e-tailers to provide flexible ways for them to experiment selectively in the malls.

Look, we are not going to dedicate 20% of any given mall to these emerging e-tailers.

But there could be a percentage, there could be 5%, maybe 10%, I don't know, we will see.

But the acceptance ratio and the quality of the conversations and the conversions into deals is causing me to be very optimistic and very convinced that 2016 is the year where tech and real estate come together.

Everybody likes to refer to where we are in the economy, etc., in baseball terms these days now that baseball season is in full swing.

And I would say we are in the first inning, the top of the first inning in terms of the convergence of tech to brick and mortar.

But that is the good news.

We've got a whole game to play this out.

But the early results are really strong in my view.

They are going to be hard -- they are not going to be moving the needle financially in the early days here.

But it is going to create incremental demand, incremental excitement for our shoppers and I believe that it is going to change the face of our shopping centers going forward.

To be determined; to be watched as time goes on.

But I sit here today very bullish and optimistic about the opportunity here.

Okay, thanks for that.

And are there certain malls that you think this will take place in sooner rather than later if we want to sort of get a firsthand look at how these things are evolving?

Yes.

We are going to -- it is funny, these e-tailers -- you wonder if you have to convince them that they should be in the mall, they are pretty smart.

When you talk to them and say, okay, now, where would you like to be.

They say, oh, Santa Monica Place, Tysons Corner, Broadway Plaza, Corte Madera, Queens Center -- I don't know if they are reading our supplement or what, but they are pretty smart in terms of where they are picking.

Now they are also picking and we are also focusing on digitally savvy communities.

So, Northern Virginia, New York City area and Southern California, in particular Santa Monica, is a great testing ground because it gives the brands the opportunity to show off their ideas, for example, here in Santa Monica to the community here, which 55% of our business community in Santa Monica is now digital, they call Santa Monica the Silicon Beach.

So, the bay area, Southern California, Tysons Corner, places North Bridge, Chicago, Michigan Avenue, the boroughs in New York -- these are the initial places that they want to experiment.

And we are fine with that.

Okay, thank you.

Michael Mueller, JPMorgan.

A couple questions.

First, why was 500 North Michigan pulled from the shadow pipeline?

And then second, can you give an update on the Candlestick development?

No big deal on 500, it is just that we had placed the placeholder in there early on as to what we thought we were going to spend there.

It has becoming increasingly apparent that it is going to be a completely tenant driven and development driven conversation.

That number may be high, it may be below what we originally thought.

As we develop an idea for what we are really going to do there, which has been partially influenced by our recent acquisition of the square block of Wabash which has really upgraded our thoughts, we will bring it back into the shadow pipeline and the real Line.

My guess is next time it comes back it will be in the real pipeline not the shadow.

As far as Candlestick goes, everything is proceeding well there.

Our anticipation is that that will open in late 2019.

And could be earlier than that but I am not -- I doubt it.

It is a very big development surrounding us and so there is tremendous amounts of infrastructure that are being put into place to enable the shopping center to exist -- things that we don't control.

So, the opening day could move around a little bit one way or the other.

But demand has been very good from the retailer perspective.

We think it has an opportunity to be a really great center.

When do you think you will start construction on that one?

There's a huge amount of infrastructure that has to be done.

So, the actual start of interest -- of our work is actually quite late in the cycle.

So it is almost two years from now.

Okay, thank you.

Alexander Goldfarb, Sandler O'Neil.

So just a few quick questions.

First, Tom, on the stock buybacks, you guys have $1.2 billion, you have done $800, so the $400 that is remaining, didn't hear any mention of it in guidance.

So, one, is there any of it in guidance?

And two, what do you guys think as far as completing the rest of the $1.2 billion or the $800 million is where you are now and there will always be some excess out there for future use but nothing planned at the moment?

Yes, the entire $1.2 million was factored into the guidance.

We felt the first two ASRs were fairly successful.

So there is certainly a possibility we would do a third.

But for now that is in guidance.

Tom, it is in guidance, right?

Yes, it is in guidance.

Okay, okay.

And then on the urban front, you guys mentioned that your malls are more urban, obviously more shoppers.

And at the same time when you guys were walking through the NOI differences last year you mentioned that higher cost of operating (technical difficulty) urban lead to differences in NOI margin.

But just curious over the past 6 to 12 months there has certainly been a lot more initiatives on minimum wage in a lot of the urban areas.

How has this manifested itself either in mall operations or in what the tenants are able to pay as far as rent or what have you?

So, basically how has it impacted the mall business if at all?

It has not.

Okay, okay.

Thank you.

I mean there is -- as that happens there will be one argument that would be that as minimum wages go up people have more money to spend and so sales go up.

So does that counteract the cost of labor going up also?

I don't know.

The truth of the matter is, by the way, the vast majority of our employees are already well above minimum wage anyway.

So that does have impacts on restaurants and some retailers.

But the truth -- the other flip side of that is Chicago has the highest real estate taxes in the country.

That doesn't drive retailers away from doing business in Chicago, they just accept the fact that if they are going to do business in Chicago they are going to pay high real estate taxes.

Santa Monica let's say it has a living wage that is enacted here.

That is not going to drive people away from doing business in Santa Monica.

It just -- they realize that that is part of the equation.

Okay, thank you, Art.

I think it would be more of an issue in secondary less densely populated trade areas certainly.

Thank you.

Todd Thomas, KeyBanc Capital Markets.

Just first just a follow-up on the stock buyback.

So it is in guidance, but it sounds like it is not something that is definitive at this time, which I think is a change in the messaging around that.

I guess based on your comments, Art, in your prepared remarks about public and private valuations it would seem like a certainty.

I'm just trying to understand whether anything has changed there with regard to your plans to complete the full $1.2 billion?

It is a certainty.

Okay.

You can book it.

As Hawaii 5-0 said, you can book it, Dano.

All right.

Then I guess a follow-up for Tom on that then with regard to the balance sheet.

So after the sale of Capitola, the line balance is a little under $700 million.

Add another $400 million on the stock buybacks and you still have to fund the development and redevelopment another $600 million or $700 million of pro rata spend there.

So what is the plan to permanently finance the line and are you comfortable taking up leverage at this point in the cycle?

You have also got to keep in mind, Todd, we have got Broadway Plaza coming on that is unencumbered today and we have very little NOI coming in from there.

So that is going to come up.

At the end of the day we're not going to be taking leverage up much at all.

Remember, we pre-funded the buyback with the $2.3 billion we generated by selling the joint venture interest.

So unlike a lot of companies that lever up to do the buyback, we already raised the capital ahead of time.

In terms of the line, I mentioned a couple of financings.

We are pulling a substantial amount of excess proceeds out of the North Bridge financing, for example.

We will do the same at Corte Madera.

And in addition, given the great financing market, we will probably put a long-term mortgage on Fresno Fashion Fair, which is currently unencumbered and that is about $340 million of proceeds that would then be used to pay down the line of credit.

So, we expect even after a third ASR, or however we choose to do it to get the buyback up to the $1.2 billion, that we would have a line that would vary between $500 million and $1 billion, which is comfortable for us given that we can take that line all the way up to $2 billion.

Okay, and then just one more.

Just follow up on the e-com retailers that are opening stores and leasing space.

How big of an opportunity is that as you see it today?

Is there any way that you could maybe frame it up for us so that -- share with us how you are thinking about it as a potential opportunity over the next few years?

I am not ready to quantify it for you, but it is the single biggest opportunity that I see.

I am absolutely certain that this is going to happen, I am absolutely certain that it is going to be very incremental and I think it is going to be material.

Look, we have to play the hand out, there will be higher failure rates with experimenting with some of these e-tailers, which is one of the reasons that we need to figure out a vehicle to allow them to experiment with us without a lot of friction or expense.

So we are working on a store model that makes the opening of a store for an e-tailer much less costly and less risky for both of us.

But I am absolutely convinced that over the next three to five years that there will be an incremental 5% to 10% of our EBITDA will be coming from retailers that don't exist in the brick and mortar world today.

And that is very significant when you add it all up.

Okay, that is helpful.

Thank you.

Christy McElroy, Citibank.

Just on sales productivity, in looking at Biltmore, Scottsdale and Kierland, for all three sales are down about 3% to 5% year over year.

Is there anything market specific going on with traffic there?

And then also what was the rationale for removing the Group Five property level sales leader?

I will take the first part of that question.

I don't think there is anything unique about Phoenix other than remember last year in the first quarter the Super Bowl was in Phoenix, which did boost activity at all the properties.

And Christy, in terms of the bottom section, the list there, it is only about 5% of our total NOI, so it is not terribly material.

But we did find it put us at a little bit of a competitive disadvantage as we try to market some of those assets for sale to have the sales per foot number in there.

And we saw far more detriment from a business standpoint than benefit for including those.

So they have been taken out.

But again very immaterial, about 5% of our total NOI and hopefully shrinking.

Hey, Art, it is Michael Bilerman speaking.

Just one question -- just a question on sort of capital allocation.

And you talked in your opening comments about selling assets at private market pricing and being able to buy your stock at what you -- you used the word firmly in the press release -- believed to be a discount to those values.

And so, as I think about as you sort of complete the $400 million which we can book it, and then you have the redevelopment and development pipeline, you have the same-store growth that you are pushing.

If the stock doesn't start to reflect what you firmly believe is NAV after you do those three things what do you do?

I don't know, it is the same question that I think applies to 99.9% of the REITs in America.

I think we are the only one that have taken significant action on that point.

We are putting -- we are taking action that expresses our conviction in these beliefs.

We are delivering significant I think value back to our shareholders through the special dividend that we pay as well as the stock buyback.

And we will revisit that as we get closer to finishing up the initially announced stock buyback.

But again, I would point out we are the only REIT that has done this in our space in this material of a way.

And yet we all are faced with exactly the same issue; as a matter of fact several analysts believe that other mall REITs are trading at even greater discounts to their NAV than we are.

Right.

No, I wouldn't disagree with that.

Just whether you had something else in mind to help narrow that gap.

It is not a unique issue to Macerich.

But we are the only one that has done anything about it in a material way.

Yes, thank you.

Ki Bin Kim, SunTrust.

A quick question on your same store NOI.

How much of that did it get a benefit from some of your development or redevelopment projects being included in this year's comp?

We don't include redevelopment or development projects unless they have been in for the full period for both periods.

Others in the sector do include it, but we don't include it.

So in other words, Broadway Plaza probably won't be included in same center NOI until about 2019, for example, even though rents and NOI start coming online.

I mean we think that is an artificial boost to the same center growth number and we don't do it.

But how about Tysons which I believe [has been] in both periods?

Well, Tysons office has been in for both periods and is included.

I wouldn't say it has materially changed that number.

Tysons apartments are not included and the hotel is not included because they haven't been in for the full period in both.

Okay.

And if I look at your expense margins, and I am just looking at management company expenses and shopping center expenses as a percent of base rent.

It seems like in the first quarter it went up to like 71% which is a bit higher than normal.

With your recovery ratios going down a little bit on a bad calculation.

Just curious if there was anything unusual or seasonal in there.

Well, as I mentioned in my earlier remarks, we do have a seasonal business.

So you can't look at the gross margin for example based necessarily on one quarter and compare it to the prior quarter, because we have 30% of our FFO comes in in the fourth quarter.

So compare the fourth quarter of 2015 to the first quarter of 2016 on most metrics is inappropriate.

You need to compare it to the same quarter of the prior year.

And as I mentioned, and this does not include the management company, but we look at operating margin, Ki Bin, as I said before, operating margin for the first quarter of 2016 was 68.6% compared quite favorably to the first quarter of last year which was 66.6%.

Yes, I was looking at it year over year.

I probably should have clarified.

But I guess we can take it off-line.

Okay, happy to do that.

Paul Morgan, Canaccord.

Just going back to the e-commerce thing one more time -- I mean given all the discussions you have been having recently, I mean does it make you think any differently about the kind of keepers and assets you might look to sell just in the context of a new generation of retailers maybe thinking differently as they roll these things out?

I mean, obviously it seems like kind of traditionally new retailers look to start with a lot of the high end malls.

But maybe kind of if the e-retailers are thinking about it as much from kind of initially from a marketing perspective the tone of those discussions is different.

I mean is there any kind of takeaways from those conversations that pertain to your asset management?

Well, a little bit.

I mean more in the context that it validates all that we have been doing over the past five years in continuing to upgrade the quality of our portfolio, really focusing on assets that are in the heart of the last mile.

And that is really the issue if you are talking about what is a digitally born retailer think about.

I think they think about the last mile.

They don't necessarily think about high-end because a lot of the goods that digital retailers are selling are not high end.

And so I do think they think about where would I like to be where I can get -- in the digital world they think about eyeballs; in the physical world they think about foot fall.

So, where can I go that has got a lot of foot traffic?

Where can I go where retailers are proven winners?

Where can I go that is in the heart of a densely populated trade area?

All of those factors that I think will influence where the e-tailers of the world will want to initially migrate really puts us in a perfect position to service their needs.

Now how far will they go beyond that, time will tell.

I mean there is one case to be made in my mind that certain digital retailers will actually be -- will do really well in secondary and even tertiary markets where they can access a market and provide an exciting retail experience to that market that that market normally, that those shoppers wouldn't otherwise be exposed to.

Time will tell.

But I am absolutely convinced that convergence is happening.

If I had to put it in terms of where we are in the cycle, like I said, first inning.

But I think it is going to be a real source of excitement for our properties and profits.

Great.

And then just kind of separately (multiple speakers).

And I would also say the opportunity from this new retail demand dwarfs -- dwarfs the old school retailers that may file bankruptcies and shrink their store counts over time.

I mean how many chains would you say that you have spoken to where you think you could open a store of theirs kind of in the next 12 months?

More than a dozen but I am not going to name names.

Okay, that is helpful.

And then just a second question on occupancy.

There were a few malls that had big dips quarter to quarter, so Corte Madera, Santa Monica, Stonewood.

Anything specific?

Is that going to bounce back or what went on there?

Sure, Corte Madera and Santa Monica, these are centers that have pretty small middles.

So a couple of bigger tenant moves can affect the occupancy.

At Corte Madera Banana Republic had an 18,000 foot store, two levels and we relocated them into a new 9,500 foot store.

So that impacted the occupancy.

And at Santa Monica Place we had a bankruptcy with Kitson which is actually, as we talked about earlier, a great opportunity long-term in terms of improving quality, improving rent and in the short term might be an opportunity for some of the digital efforts that have been discussed.

And then we actually had a lease with [CB2] that we, as the landlord, terminated.

So those affected the occupancy in the first quarter.

Okay, great, thanks.

Andrew Rosivach, Goldman Sachs.

Good afternoon, this is actually Caitlin Burroughs.

I had a question regarding the share repurchases that you did in the first half and those that you plan to do in the rest of the year.

Does that give us good reason to think then that 2017 should see extra strong earnings growth or is there some other separate moving part that could limit that potential?

Look, you've got a lower share count and you have the same amount of revenue growth at the properties, I think that does translate into a lift to your growth momentum, that is really part of the reason.

It is really a very good question actually.

A lot of people focus on the one-time discrepancy between private and public market values.

But what they don't focus on, it is a very good point, is that by reducing the share count, if you still have the same fundamental positives at a property level, that it does accelerate your EBITDA growth rate.

So, yes, I would say the answer is yes.

Okay, and I would just (multiple speakers).

I don't think we are in position to give guidance yet for 2017.

Oh, I am talking -- I am only talking academically and in intellectual purity.

Well, I would just say perhaps an addendum to your comment, then that would be maybe acceleration of EBITDA per share.

Okay, thank you.

Because you have got the lower share count.

Good point.

Okay.

And then just on the sales side, you guys obviously break out your sales by buckets.

And even at your top properties there was some good growth overall in the trailing 12 months.

So I was just wondering if you had any idea versus what some of the other A malls have been reporting in that tourists and their spending have been negatively impacting them, how your portfolio has been able to still generate growth and kind of be okay even despite that.

Well, I think we talked about on one of the previous calls, we don't have a huge exposure to many of the traditional tourist markets.

We do have certain properties like Fashion Outlets in Niagara or Santa Monica that have a big tourist element.

And Arizona.

And Scottsdale as well.

So, yes, we are not immune.

Right, but the New York properties are not really tourist based, and so our portfolio is probably not as influenced by those factors.

Okay, thanks.

I think we've got time for one more question.

Operator, do we have another question?

Craig Schmidt, Bank of America.

This is I guess for Bobby.

Bobby, heading into 2016 you perhaps had a more cautious view of store closings.

Now that we are four months in is it as you expected or are you still looking for more shoes to drop?

No, I would say within our existing tenant base nothing that has occurred during the first four months is really a surprise to us.

So I think it is pretty much along the lines that we have expected.

I think there is certain elements that have done better maybe than we had expected.

Art touched a little bit on the emergence of e-commerce retailers into the shopping centers.

We have seen increasing activity -- albeit small in terms of numbers, we are seeing increasing activity from that sector so that has been a positive.

The leasing on the development projects has been strong.

So I would say within the existing tenant base it is sort of as expected and some other areas continue to remain strong.

Okay, great.

And then just a little bit about Fashion Outlets at Philadelphia.

You had mentioned things were going well there.

Are you successful in winning some important food components to come to this project?

We think food will be a big part of that merchandise mix.

And we think there are some really good opportunities in particular because of the market and the nature of smaller chef opportunities and market.

So our restaurant group is very focused on that and we do see that as an opportunity given the downtown location and the transportation system.

And the addition of a lot of new hotels and residential -- it is -- just part of the overall fabric of downtown Philadelphia has seen a tremendous amount of new restaurant activity, which is really a function I think of servicing the incremental residential population as well as tourists that are there.

So we are just part of that and we benefit from that.

So, yes.

Okay, thank you.

Thank you.

All right, thank you all for joining us.

We look forward to seeing you next month, so a lot of you at NAREIT.

And look forward to reporting on the balance of the year.

Thank you.

And with that, ladies and gentlemen, that does conclude today's conference call.

We would like to thank you again for your participation.

You may now disconnect.