Macerich Co (MAC) 2016 Q4 法說會逐字稿

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  • Operator

  • Good afternoon, ladies and gentlemen, and thank you for standing by.

  • Welcome to today's Macerich Company fourth-quarter 2016 earnings conference call.

  • As a reminder, today's conference is being recorded.

  • (Operator Instructions) I would now like to turn the conference over to Jean Wood, Vice President of Investor Relations.

  • Please go ahead.

  • Jean Wood - VP, IR

  • Thank you, everyone, for joining us today on our fourth-quarter 2016 earnings call.

  • During the course of this call, 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 the variety of risk, uncertainty, 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 measures are included in the earnings release and supplemental files 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.

  • Tom O'Hern - Senior EVP, CFO & Treasurer

  • Thank you, Jean.

  • The fourth quarter reflected continued solid operating results, as evidenced by the strength of most of our portfolio's key operating metrics.

  • FFO was $1.17 per share compared to $1.12 for the fourth quarter of last year.

  • For the full year, FFO per share was $4.07, which was at the midpoint of our initial guidance after factoring in the dilution from the Capitola sale, which was not part of our original guidance.

  • Same-center NOI in the fourth quarter, excluding straight-line rents and FAS 141 income, was up 2.1% compared to the fourth quarter of last year.

  • The decrease in this growth rate compared to earlier in 2016, as discussed on the last call, was expected due to the occupancy losses from tenant bankruptcies and the tough comparison to the fourth quarter of 2015, which grew at a 6.4% clip.

  • Same-center NOI for the year was at 5%, which is at the top end of our guidance range.

  • Gross operating margins on a same-center basis for the quarter were 70.5%, down from 70.9% in the fourth quarter of 2015.

  • Occupancy declines were the primary reason for that decline.

  • Full-year 2016 gross margin was 69.7%, up 45 basis points from the 69.25% in 2015.

  • The CAM expense recovery rate, including joint ventures pro rata, was at 95% for 2016, and that was down from 103% in 2015.

  • A significant factor in that decline in addition to the occupancy losses was the change in the portfolio composition in 2015, which included the full-year impact of the new Tysons Corner Hotel, Tysons apartment tower, and Tysons office building, all of which incur significant operating expenses and have no related recoveries.

  • We expect the recovery rate in 2017 to be similar to 2016.

  • If you look at the recovery rate for 2016 without the Tysons buildings, it was 99.5%.

  • Bad debt expense for the quarter was $1.4 million, up slightly from $1 million in the fourth quarter of 2015.

  • Lease termination fees were $4 million in the fourth quarter compared to $2.5 million in the fourth quarter of 2015.

  • During the fourth quarter, our average interest rate was 3.56%, down slightly from a year ago when it was 3.6%.

  • The balance sheet continues to be in great shape.

  • At quarter-end our balance sheet metrics included debt to market cap at 40.8%; and interest coverage ratio of 3.8 times, which is the best in our company's history; and an average debt maturity of 6.3 years.

  • The financing market for us remains very good, and even as rates have increased, the borrowing spreads have decreased and we are still able to get 10-year fixed rate loans at less than 4%.

  • A couple of examples of this includes on October 6 we closed on a $325 million financing of the previously unencumbered Fresno Fashion Fair.

  • The CMBS loan on this is a 10-year fixed rate loan with an interest rate of 3.95% -- excuse me 3.59%.

  • The proceeds from this financing were used to pay down our line of credit.

  • In addition, in February of this year we committed to a $225 million loan on Kierland Commons.

  • That is a 10-year financing that we expect to close in March and has a coupon of 3.95%.

  • During 2016, the Company closed on $1.8 billion of fixed rate mortgages with an average loan amount of $300 million.

  • These are high-quality assets; the financings are very attractive.

  • The average term was 11.1 years and the average interest rate on that $1.8 billion of financings was 3.79%.

  • After Kierland, we do not have much in front of us in terms of loans maturing in the next two years.

  • We have only $99 million maturing in 2017 and $400 million in 2018.

  • In the press release last night we issued our guidance of $3.90 to $4.00 a share for FFO.

  • Included in the guidance is $0.08 of dilution from the January 2017 sale of Northgate Mall and Cascade Mall and an additional non-core asset that is currently under contract.

  • No other 2017 dispositions or acquisitions are included in guidance.

  • Other major assumptions include, as we mentioned on the last earnings call and we have not changed, that we have forecasting for 2017 a same-center NOI rate of 3.0% to 4%.

  • This factors in, on average, about 100 basis points of occupancy loss versus 2016 and factors in the closure of both Limited and Wet Seal, as Bob will talk about in a few minutes.

  • Some of the factors impacting the comparison of FFO projected for 2017 compared to actual 2016 include, in the case of Kings Plaza -- it's a great long-term move for Kings Plaza -- the early termination of Sears.

  • But it did cause temporary loss of rent and other charges, including non-cash items of about $0.11 a share.

  • The impact of long-term fixed-rate financing, which resulted in paying down short-term floating-rate debt as well as an assumed increase in the LIBOR rate for 2017, resulted in a negative impact on 2017 guidance of about $0.08 a share.

  • These financings continue to strengthen our balance sheet and extend our debt maturity schedule with the negative being the earnings impact.

  • We also are projecting no land sales in 2017 versus 2016, which is about $0.03 a share negative impact.

  • The quarterly split we are projecting in FFO is 21% of our FFO for the year to be in the first quarter, 23% in the second quarter, 26% in the third quarter, and the remainder in fourth quarter.

  • Now I would like to turn it over to Bob to discuss the tenant environment.

  • Robert Perlmutter - Senior EVP & COO

  • Thanks, Tom.

  • Leasing within the Macerich portfolio generated solid fourth-quarter results capping a productive year in 2016.

  • Our trailing 12-month leasing spreads increased to 17.7% from the third-quarter rate of 16.1%.

  • The increase in spreads was generated with above-average performance at the higher productivity centers.

  • Average rent for leases signed during the trailing 12-month period was $56.57 per square foot, up marginally from the third quarter.

  • During the fourth quarter a total of 962,000 square feet of leases were signed.

  • This represented a 20% increase from the previous quarter.

  • This increase was primarily the result of a number of large renewal packages completed in the fourth quarter.

  • The average term for leases signed in the fourth quarter was 5.3 years.

  • Occupancy at the end of the fourth quarter was 95.4%.

  • This represented a 10 basis point increase on a quarter-over-quarter basis and our temporary occupancy ended the fourth quarter at 5.2%.

  • As we have talked in the past, occupancy at the centers continues to be impacted by bankruptcies and early lease terminations.

  • These bankruptcies often present opportunities to secure more productive and more contemporary tenants that will generate higher sales productivity and increase revenues in the coming year.

  • They do, however, cause some short-term vacancies at the properties.

  • Our portfolio sales ended 2016 at $630 per square foot.

  • This represented the 0.7% decrease on a year-over-year basis.

  • On a same-center basis, in 2016 sales were $650 per square foot and this represented a 1.1% increase for the year.

  • Fourth-quarter sales were supported by a strong December, when total sales increased by 1.7% and comparable sales were up 2.1%.

  • Recently, The Limited and Wet Seal declared bankruptcy and announced they will liquidate their remaining store locations.

  • Within our portfolio we have 15 stores with The Limited totaling 74,000 square feet, but generating only $240 per square foot in sales.

  • The average gross rent for these 15 stores was $65.04 per square foot.

  • Their store locations are in some of our best quality centers.

  • To date, we have completed deals on five of these locations totaling 25,000 square feet.

  • We have nine stores with Wet Seal totaling 38,000 square feet and generating $250 per square foot in sales.

  • The average gross rent for these nine stores was $68.42 per square foot.

  • Similar to The Limited, Wet Seal is located in a number of our better quality centers, having elected to keep these locations during their bankruptcy less than two years ago.

  • To date we have completed deals on two of these locations, totaling 8,500 square feet.

  • As a side note, in 2012 we had 32 stores with Wet Seal.

  • Combined, we have re-leased 33,500 square feet, or approximately 30% of these spaces.

  • The blended in-place rents were $70.95 per square foot gross; the new starting rents are equal to $81.01 per square foot gross.

  • This is a 14.2% increase.

  • So let me conclude, we are very pleased with the composition of our shopping center portfolio.

  • We believe these centers represent important locations for retailers seeking a national brick-and-mortar platform, including locations in many important gateway cities.

  • We see further opportunities in leasing by: one, continuing to attract new mall-based retailers; two, maintaining and expanding our most successful mall tenants; three, consolidating retailers and uses historically located near, but outside, the mall; and lastly, by securing new food, entertainment, health, and mixed-use opportunities.

  • With that, I'll turn it over to Art.

  • Art Coppola - Chairman & CEO

  • Thanks, Bob.

  • Thanks, Tom.

  • As you can see from our report, all of our operating fundamentals remain extremely solid, as they have over the past year, and our outlook on all of our fundamentals for the upcoming year remain extremely solid.

  • With the past year, as I think about what we've accomplished, we have come a very long way.

  • The game plan that we outlined going back a year to 15 months ago has been executed with the major part of that game plan being the very large joint ventures that we completed with the subsequent very efficient buyback of stock in the beginning part of 2016.

  • In my comments I would like to talk about a couple of disconnects that I see that have been brought up to me from investors, in particular, over the past couple of months.

  • One of them relates to the disconnect that some investors have and that we have from the future prospects for re-leasing spreads.

  • Is the mark-to-market positive?

  • Are we going to be able to maintain positive re-leasing spreads?

  • And the other one relates to what's happening with private market valuations.

  • But first of all, let me focus on re-lease spreads.

  • As you know, over the past five years, 10 years, 15 years, 20 years that we have been a public company, we have reported our re-leasing spreads every quarter and every quarter they're in the midteens in a positive way.

  • And people legitimately can ask the question that would be essentially a hypothesis, which is that while we hear from certain retailers that mall traffic is down, we therefore expect that comp sales are going to not be robust.

  • And if that's the case, then at some point in time re-leasing spreads have to come down to a much more moderate or even flat level.

  • And that line of thinking would be valid except for the assumptions that are in the question are not valid.

  • First of all, traffic is not down in well-located centers.

  • In fact, we have many cases where it's up significantly.

  • Secondly, the whole thesis that comp sales themselves should be a leading indicator of re-leasing spreads is not founded on firm ground.

  • And let me give you some numbers.

  • As you know, we are the only mall company that publishes our sales per foot by property and have done so basically over the past seven years, so you've got seven years of history.

  • If you take a look at the seven years of history that we have reported to you on our portfolio, you are going to see that only on a comp center basis -- and I'm only talking comp centers, meaning the centers that we owned in 2009 that we still own in 2016.

  • Looking at that alone, that portfolio of comp centers has gone up in sales per foot 37% over the past seven years, which doesn't ring true to the comp sales increases that we report every quarter and every year.

  • The CAGR growth in terms of sales per foot productivity on a comp center basis and then on a total center basis in our portfolio has been roughly 5%, 6% a year.

  • And certainly if we had been reporting comp sales increases of 5% a year, we'd all be ebullient.

  • The reason -- and a second number I want to share with you is that if you go back and you look at our ABRs, our average base rentals that were in place seven years ago, they were $40.67 a year in 2009 end of.

  • And at the end of 2016 it was $54.87, so let's just take a look at that.

  • Sales per foot over the past seven years in our portfolio on a comp center basis have gone up 37%.

  • That translates to average base rents going up 35%, so the old saying that rent is a function of sales seems to be pretty correlated here.

  • Now how is it that those sales per foot went up in total when, in fact, on a comp basis, if you take a look at every tenant that was in business back in 2009, it didn't go up on that level?

  • And the answer is simple.

  • Remember early in the year we talked about the opportunity for re-leasing spreads that is generated by constantly being vigilant and taking the tenants that are your bottom 35% to 40% producers and replacing them with tenants that can do better than the mall average.

  • And that is exactly what we have done and that is exactly what other folks that own great centers like we own are able to do.

  • This is why we have been able to produce these re-leasing spreads that for the past year, again, are the midteens.

  • And as we even look at the mark-to-markets and we look at bankrupt tenants, we continue to see that kind of opportunity going forward.

  • So I'm happy to talk to you further, if you'd like, on the re-leasing spreads, but there is absolute foundation for the opportunity for these spreads to continue.

  • And, oh, by the way: even though our sales productivity has gone up 35% in seven years and our base rents have gone up 37% in five years, our cost of occupancy, as a percentage of sales, has actually gone down from 14.2% to 13.4% in the last seven years.

  • So that again gives us room for growth.

  • The second disconnect that I want to talk about that people seem to be -- and this is really, frankly, quite shocking to me -- they seem to be focused on is there seems to be a perception that private-market valuations of Class A fortress regional malls have somehow changed in a negative way in the last few months.

  • And I can tell you that that disconnect is absolutely not founded in fact.

  • We have gone and talked to folks that we recently transacted with on major joint ventures and said to them, on an anecdotal basis, would you have capital and would you be interested in doing a deal at those kind of cap rates and those kind of multiples today, just as you did a year ago?

  • And the answer comes back a resounding yes.

  • You look at the absolute -- we have an absolute pulse on where the values are on Class A regional malls.

  • You look at and you talk to folks and the belief that values have come down just doesn't ring true.

  • Now one of the reasons that people believe that values may have come down is because of the prospect of rising interest rates.

  • I can tell you that other than shocking increases in interest rates and interest rates that go up for reasons that are not -- that reflect something bad in the economy that there's very little correlation certainly between interest rates and cap rates for Class A regional malls.

  • In my own experience, so long as the interest rates, the long-term interest rates still remain below the cap rates, they tend not to have much impact on the cap rates.

  • And you have to think about also, look, what is it that's causing interest rates to go up?

  • I believe there's a general perception that one of the reasons that the Fed and others are raising rates and believe rates are going to go up is that they believe that inflation, which has been nonexistent for the past 10 years, may begin to come back into the picture.

  • And I can assure you that inflation is the friend of a regional shopping center owner.

  • The final thing, just if you want to think about it from a macro viewpoint.

  • Over a very long period of time -- I saw a study and I wish I could reference it for you, but it measures rent growth for all the different product types on a global basis and the two product types that over past 30 or 40 years showed the strongest rent growth was high street retail and Class A fortress malls.

  • When you think about that you think about Class A fortress malls, in particular in the United States, the pool of assets that is available for folks to invest in is not increasing and the ownership is consolidated in the hands of people that are not going to sell them.

  • And yet the capital that is available and that has an appetite to invest in them just grows over periods of time.

  • It remains constant and the pool of capital that would be interested in tapping into co-investing with owners like ourselves and our peers that own the Class A regional malls gets deeper every day for many, many different reasons.

  • I now want to move over to just comment on dispositions.

  • The past 14 months, with the sale of Panorama, Capitola, and recently Northgate and Cascade, we have sold another four malls.

  • They -- we generated $368 million of proceeds from them.

  • Those malls had sales of roughly $360 a foot.

  • You look back over the past five years, that makes roughly 20 malls that we've sold that were generating sales of roughly $335 in total and helped us to generate proceeds of $1.8 billion.

  • And we absolutely believe that what we have been doing and that we are doing in terms of pruning our portfolio and many times putting the properties into the hands of a buyer that can focus on it in a more entrepreneurial way than we have, that doing all of this has been very prudent.

  • But, look, it doesn't come without an impact on earnings; that's obvious.

  • If you take a look at $1.8 billion of dispositions over the past five years and you assume an average cap rate of 7%, 7.5%, whatever number you want to put on that, and you assume that the money in the meantime goes to pay down debt or gets reinvested, over a period of five years that adds up to $0.50, $0.60 a share of dilution in earnings any way you slice it.

  • But it positions the Company for above average same-center growth, which we achieved very good growth in 2016.

  • Look, we are trying to be realistic about our growth prospects for 2017, but it has positioned our portfolio and our balance sheet for a very, very bright future.

  • As I think about dispositions, that brings me to the issue of department stores.

  • In the recent store closing announcements from Macy's and Sears, we were fortunate to basically not have any surprises.

  • We had one location which was Westside Pavilion, which we knew about, that was going to be sold by Macy's and I believe that has been done.

  • But, you know, the department stores need to take a page out of the book that folks like we have, where we are pruning assets that are not core to our fundamental business.

  • Then we are taking that money and we are reinvesting that into our core business.

  • That's what the department stores need to do and, hopefully, that's what they will do.

  • Look, we expect more closings over a period of time and we do see it as an opportunity for a net positive for the retailer if they redeploy that money into their core business.

  • And certainly from our viewpoint we see there is a net positive is we get back supply of space that we can utilize to bring in either other department stores or other uses that can generate traffic that will increase the overall sales productivity of the center and obviously result in ever-increasing re-leasing spreads and same-center growth.

  • So with that, I would like to welcome you to the call and open it up to questions.

  • Operator

  • (Operator Instructions) Todd Thomas, KeyBanc Capital Markets.

  • Todd Thomas - Analyst

  • Good morning.

  • Just first question for Bob.

  • Regarding the outlook for store closures and bankruptcies, how has it played out so far relative to your expectations?

  • And then any changes to your outlook around retailer bankruptcies and closures in 2017, just relative to what you were thinking or seeing over the last few months?

  • Robert Perlmutter - Senior EVP & COO

  • I don't think we've seen any change in our thinking.

  • The two bankruptcies that occurred so far, again, were not surprising, especially Wet Seal, who had been through bankruptcy about 18 months ago.

  • When you look at their sales productivity, it was clear that they were candidates.

  • I think, if anything, the nature is changing a little bit in the sense that these chains are a little bit smaller than some of the chains that we saw in 2016 in terms of their store fleets.

  • Todd Thomas - Analyst

  • Okay.

  • Then the 100 basis points of occupancy lost that Tom mentioned that's embedded in guidance, how much of that is already baked in versus what's speculative?

  • Then for the Wet Seal and Limited stores that you have already re-leased, can you speak to some of the retailers that have taken some of that space?

  • Robert Perlmutter - Senior EVP & COO

  • I'd prefer not to talk about the retailers, but generally what we find in terms of replacement tenants, obviously, if we can bring tenants -- and we do bring tenants -- that are close to the mall average, in many cases we're either doubling or 2.5 times the sales volume, which obviously leads to additional rents.

  • So where we are seeing the tenant demand is from those that are doing well, that want to expand their store.

  • In certain cases they are new to the centers; in certain cases they are foreign retailers.

  • But, as I mentioned, Limited and Wet Seal were generally in our better-quality centers, which allows us to replace them with a better-quality tenant.

  • In terms of the occupancy, how much is baked in, there's really two pieces.

  • One is the residual piece from 2016, which carries over into 2017, as well as some estimates for 2017 bankruptcies, both those that are known and those that we are concerned about.

  • Todd Thomas - Analyst

  • And how much of the 2016 occupancy losses is being carried over?

  • Robert Perlmutter - Senior EVP & COO

  • I would say it is probably evenly split if I had to make an estimate.

  • Tom O'Hern - Senior EVP, CFO & Treasurer

  • That's right.

  • Most of the 2016 is front-end-weighted into 2017 and the estimates for 2017 are -- other than what's known already, such as The Limited and Wet Seal, is more towards the back half of the year.

  • Todd Thomas - Analyst

  • Okay, thank you.

  • Operator

  • Alexander Goldfarb, Sandler O'Neill.

  • Alexander Goldfarb - Analyst

  • Good morning out there.

  • Two questions.

  • First, let me start -- well, actually let me just ask on the redevelopment.

  • I noticed that Tysons and Scottsdale were pulled out of the supplemental.

  • Those had been outlined with timing and with dollar amounts.

  • In addition, you guys had the Scottsdale press release, Phase 1 luxury to be then followed by mixed-use sort of a la Tysons, a la Broadway Plaza.

  • So can you just give us an update of these two projects and if it's a change in the retail environment, maybe a change in financing environment, or what caused the projects to be pulled out?

  • Art Coppola - Chairman & CEO

  • That's completely driven by me, Alexander.

  • When we first put those in we knew that we still had to get certain entitlements, especially related to Scottsdale.

  • And when I was looking at the expected delivery date, it just was clear to me that, look, 2018 to 2019 is just not realistic on these two.

  • We would have to be in the ground for 2018 to be realistic.

  • And given that we are still bidding and wrapping up in the next couple of months our approvals at Scottsdale -- we need to get those approvals, which I am highly optimistic that we will get them.

  • And then when they -- both of them will undoubtedly be coming back into the pipeline.

  • But instead of having to be determined or some uncertainty around the delivery date, we will have a much harder delivery date, as well as the refined scope on each of the projects and refined ROIs on each of the projects.

  • They will both they will both come back.

  • But the passage of time had caused the information to get stale, and instead of trying to footnote changes to each of them, I just personally decided that I was going to pull them out until they are ready to get baked into black and white so that we can give you hard delivery dates the next go around.

  • Alexander Goldfarb - Analyst

  • So, Art, on the luxury part of Phase 1 at Scottsdale, is that also on hold or --?

  • Art Coppola - Chairman & CEO

  • No, no, no.

  • I'm sorry; I was only talking about the mixed-use portion of Scottsdale.

  • Robert Perlmutter - Senior EVP & COO

  • Alex, this is Bob Perlmutter.

  • We feel very strongly there's three very important opportunities at Scottsdale, which as you know is one of our largest and most important centers.

  • The first is the opportunity to expand and elevate the luxury, which we have begun that process.

  • We think -- we have a very strong luxury base, but we think we have the opportunity to really expand it and present it in a much more contemporary manner than we have done it today.

  • Secondly, we have a great opportunity to expand the entertainment and restaurant piece.

  • We added a Harkins Theatre; it's very successful.

  • Phoenix is an excellent restaurant market.

  • We need to improve our presentation at the center and that's a wonderful tie-in with the luxury.

  • Then the last piece, which we are committed to, is the mixed-use, which is principally office and residential.

  • This is a site that can justify densification.

  • In fact, the Phoenix office market has -- while we don't have a big presence, we do have multiple buildings there that have actually shown some fairly significant rental rate growth over the last couple years and have been a good contributor to the shopping centers.

  • Alexander Goldfarb - Analyst

  • Bobby, if I can continue with you, as you guys look and other mall owners have talked about -- you guys have Dick's at some of your malls and other power-center-type tenants.

  • Can you just walk us through -- obviously the mall guys offered much more substantial TIs than power center tenants would typically get from power center or shopping center landlords, but at the same time their occupancy cost is higher, their rent is higher, etc.

  • So when you talk to shopping center or power center tenants, do they view a one-to-one increase, so their sales are going to go up one-for-one for their cost of occupancy, or they are prepared for higher occupancy costs and maybe not have as big of a sales cost?

  • I'm just trying to understand how they think about the economics when they are deciding if they want to relocate to a mall or not.

  • Robert Perlmutter - Senior EVP & COO

  • And it's an interesting question because, as you know, many of these tenants have located in the shadow of the mall.

  • They recognize the regional draw that the mall provides, but historically much of their store expansion was outside the mall but near the mall.

  • I think with the opening of some of these department stores, what we're finding is that we now have the real estate to bring these tenants in.

  • Clearly, it's a higher occupancy cost than outside the mall, but it's also more traffic and more sales generation.

  • Dick's, as you mentioned, I think is a really good example, where three or four years ago the majority of their program was probably being done outside of the mall.

  • And today that's probably the inverse, because they see the attributes of the mall, like many retailers, which is the scale of the center, the foot traffic that's generated, and most importantly, the regional draw that the mall creates.

  • Alexander Goldfarb - Analyst

  • Okay.

  • Thanks, Bobby.

  • Operator

  • Michael Mueller, JPMorgan.

  • Michael Mueller - Analyst

  • A couple questions.

  • First, Tom, was wondering can you comment on the straight-line rent and the FAS 141 guidance for 2017?

  • And as we look forward to 2018, do you think we'd have any material differences again versus this year?

  • Tom O'Hern - Senior EVP, CFO & Treasurer

  • Mike, it would really depend on what kind of portfolio moves we make.

  • Department stores included a big chunk of the reduction in FAS 141 revenue between what we incurred in 2016 and what we are forecasting for 2017 related to the Sears at Kings Plaza.

  • Again, we don't tend to focus as much on the non-cash items and, in fact, we exclude them from our view of same-center growth.

  • They did have an impact.

  • So it's a little hard to predict that one.

  • It depends on how many more big-box deals we proactively do this year that could create some differences in FAS 141 and straight-line rents.

  • But for now, I guess for modeling purposes, I would use what we forecast here and we'll try to address those changes as we have transactions during the year.

  • Michael Mueller - Analyst

  • Got it, okay.

  • Then just thinking about new development, can you comment on the Carson City outlet site; what's just the view on the site and what the process is on your end there?

  • Art Coppola - Chairman & CEO

  • Look, we still have aspirations to do something there and when we have something more to report, we will report on it.

  • Michael Mueller - Analyst

  • Okay, thank you.

  • Operator

  • Jeff Donnelly, Wells Fargo Securities.

  • Jeff Donnelly - Analyst

  • Actually one for Tom.

  • Are you able to maybe walk us through some more of the key drivers that bridge us from your 2016 NOI to your 2017 NOI?

  • I'm just specifically thinking about maybe the change in year-end occupancy and leasing spreads or contractual bumps you see.

  • And maybe some assumptions around what you are doing for your Sears stores.

  • Tom O'Hern - Senior EVP, CFO & Treasurer

  • A lot of that, Jeff, is in the same-center assumption, which we guided to in the third-quarter call, of 3% to 4%.

  • Obviously that's less than we have run at in both 2015 and 2016, when we were in the 5%s and 6%s in terms of same-center NOI growth.

  • That encompasses the decrease in occupancy which we see that exists today and what we are seeing for the balance of the year, so that is factored in.

  • Obviously the positives there are fixed rent bumps as well as CPI bumps and getting the benefit of positive re-leasing spreads on deals that were done in 2016; that flows through.

  • But some of the negatives that I mentioned a little earlier that are fairly significant that people may not focused on; we did a lot of financing.

  • In many cases we went from floating-rate debt to fixed-rate debt, which can be -- even though we are getting some very attractive long-term rates that can still be 100 to 150 basis points negative compared to the floaters.

  • Even after the sale of Northgate and Cascade and using those proceeds to pay down floating-rate debt, we still have about $1 billion, $1.1 billion of floaters.

  • And in our opinion, LIBOR is going to continue to go up this year.

  • We factored that into the guidance; in fact, all those -- the refinancings as well as higher LIBOR -- ends up being about a $0.07 to $0.08 negative differential compared to what we saw in 2016.

  • We also expect not to see the same kind of gain on land sale that we saw in 2016, which was about $4 million.

  • And those are the major pieces.

  • Obviously Kings Plaza, which we talked about, is a relatively unique event where you have a department store that is paying you that much rent.

  • Obviously we think it's a fantastic opportunity to improve the quality of Kings Plaza, but when you combine the lost rent and charges as well as the write-off of SFAS-141, it is $0.11 negative in 2017 compared to 2016.

  • So those are the big pieces.

  • Jeff Donnelly - Analyst

  • That's helpful.

  • And maybe if I could just squeak in with a second question, sort of a two-parter.

  • One just, Art, since you had mentioned it about traffic trends; are you guys able to provide maybe some data on just in 2016 how traffic varied from your highest tier assets to your lowest tier assets?

  • I'm just curious how that correlates with sales growth.

  • Then, secondarily, maybe this is for Bobby, just retailers are getting more discriminating around their store counts.

  • We are hearing that landlords with multiple malls in a given metro are effectively having to kind of pick a winner and a loser in those markets by refocusing tenants on one property versus the other and focusing capital the same way.

  • I'm just curious; how do you guys manage that dynamic in your markets, because you are so clustered in some cases?

  • Certainly like a Phoenix.

  • Just curious how you handle that.

  • Art Coppola - Chairman & CEO

  • Sure.

  • On the traffic issue, we don't have absolute traffic counters at our malls right now across the board.

  • We have different measuring points; sometimes where we have controlled parking that's a good proxy or measuring point.

  • And we do have traffic counters in different ways at different malls that we are primarily using, frankly, more to not measure whether people are coming but how are they moving inside the property to help us in the leasing process.

  • As we think about traffic I guess the global statement I would give you is that, look, it's a fact that people are doing more research before they come and shop so -- and they are spending more per visit, which would tend to make you believe that they -- on average, that visits should go down.

  • But anecdotally and where we actually have evidence, we are not seeing traffic decreases.

  • I mean, we have some centers like Santa Monica Place where the traffic is up ridiculous amounts.

  • I think it's up 40% in the last six months, but we know why.

  • It was because some mass transit has come recently.

  • We have centers like Cerritos, where -- Bobby, what do we think the traffic is up at that center?

  • It's double -- close to 20% at least and it is generating itself.

  • And that is primarily, I think, driven by the theaters and Dick's that we added there.

  • So I can tell you that -- I'm certain that our traffic is not down significantly; if anything, it's probably flat.

  • And as I think about it from a high productivity to a low productivity, I don't have any anecdotal evidence for you on that.

  • I would just intuitively say that you would assume that at the high traffic centers traffic is going to tend to remain strong, if not get better, and at centers that are in a decline you would assume the traffic is diminishing.

  • But, to me, the real issue is why is traffic going down, if it were going down?

  • The answer is that we don't think traffic has gone down and, secondly, it's not reflected in sales.

  • I already gave you the numbers that on a comp-center basis our sales per foot over the past seven years has gone up 37% and our total sales in those same comp centers has gone up almost 40%.

  • So, honestly, when I think about traffic, our sales numbers, which we report to you center by center -- you can go back and look at our supplements and you can look at every property that we own for the last seven years and you are going to see an upward trend.

  • For all of these people that are not owners that are out there either claiming that traffic is down or retailers who are blaming traffic for the fact that they don't have the merchandise in their store that the people want to buy, it's just wrong.

  • That doesn't mean that we don't think about traffic in a very intelligent way.

  • We are really beginning to refine the way that we think about traffic.

  • We're putting in camera monitors and sensors that measure gender, customer engagement; how people move throughout the mall, which stores do they cross-shop.

  • All with a view not to report to Wall Street on this, but to enhance our leasing tools to bring in even better tenants and to have it be smarter about how we locate the centers.

  • Robert Perlmutter - Senior EVP & COO

  • Jeff, you're going to test my memory with what the second part of your question, but that I think you were asking about as retailers rationalize their store fleet in markets, what is the impact and how do we try to manage it.

  • Jeff Donnelly - Analyst

  • Yes, particularly in a market where you have multiple malls.

  • Robert Perlmutter - Senior EVP & COO

  • And Phoenix is a really good example of that.

  • Candidly, we try to use it to our benefit in terms of being able to not be in competitive situations with other malls, but control the discussion.

  • Sit with a retailer and say here's how we want you or here is the best way to cover the market.

  • We are much more effective, obviously, when we can control the dominant locations than when the dominant locations are split between multiple owners and the owners compete.

  • We have a similar circumstance in Southern California with Lakewood and Stonewood and Los Cerritos, where those three centers basically are the only opportunity for retailers in that portion of the LA market.

  • We try to coordinate the discussion, whether it is certain retailers belonging in certain centers; whether it's, in the case of Phoenix, trying to help retailers with store rationalization that includes closing stores that are outside the mall.

  • Because one of the things that will result from fewer stores in each market is the regional draw will become more important just by definition and we believe that leads them to the enclosed malls as opposed to the non-mall locations.

  • Operator

  • Paul Morgan, Canaccord.

  • Paul Morgan - Analyst

  • Thanks.

  • I appreciated the color on Wet Seal and the spreads there.

  • I don't know if I got the math right, but it looked like their occupancy cost was 25% or something like that and you brought in people at a positive spread and, assuming closer to your portfolio average, at a much lower occupancy cost.

  • But I'm kind of wondering; a lot of [apparel] retailers have had a tough (technical difficulty) year.

  • How deep is that pool of chains where they are really at unsustainable occupancy costs?

  • And how does that balance against where you are seeing demand from for people who can generate sales that are at or above your average?

  • Robert Perlmutter - Senior EVP & COO

  • Let me -- I think your math is correct; the occupancy costs were 27% or 28%.

  • But, again, both of these chains were chains that had struggled for a number of years so it's not that there was a change in the nature of the business that caused the bankruptcy.

  • It was really an erosion over a period of years.

  • What we find is, in particular if you are focusing on apparel, the market has matured and it has moved away from smaller specialty stores that primarily trade on foot traffic into larger formatted retailers.

  • People talk about the apparel sector shrinking within the malls, and that's probably true if you look at smaller-sized stores, but when you look at the aggregate numbers and include people like Zara and H&M, you find it's partly a transfer of the customers' preference.

  • And so a chain like Limited or a chain like Wet Seal, it has been in decline for a number of years.

  • They really struggled with competition and it wasn't a single event that caused it.

  • Obviously, the replacement tenants are on the other side of the business model.

  • Their business is strong; they want to grow their store fleet.

  • One of the reasons we have been able to generate a good amount of activity right away is these stores were located in good centers, in good locations, which retailers do have opens to buy on.

  • Paul Morgan - Analyst

  • Okay, thanks.

  • And then just kind of similar, but on the department store side.

  • First, just is the $0.11 that I understood from the Sears at Kings, is that the full amount that you recognized in 2016 that will be zero in 2017?

  • Is that the way to think about it?

  • Tom O'Hern - Senior EVP, CFO & Treasurer

  • That's correct, Paul, including non-cash items.

  • Paul Morgan - Analyst

  • Okay.

  • Obviously that -- it looked like maybe that one box was a third of the Sears rent to you, just looking at your top tenant list, so it's not a typical situation there.

  • But with all the focus on kind of accelerating anchor closings and maybe particularly at Sears over the coming year or two, how should we think about exposure there in terms of materiality?

  • Because it's having an impact on year-over-year growth, the timing and how (technical difficulty).

  • What (technical difficulty) think you can absorb an annual basis in terms of box closings?

  • How deep is your demand pool for that?

  • Art Coppola - Chairman & CEO

  • I'll answer that.

  • First of all, I want to remind you all that we voluntarily allowed Sears to close at Kings Plaza and to pay us a termination payment.

  • Had we not allowed that to happen, they would still be sitting there operating and paying rent.

  • We did that knowing it was going to be very expensive from an earnings viewpoint, because it gave us the opportunity to take basically 300,000 feet in a terrific mall where we've made huge headways and to completely reinvent it.

  • We have a really exciting merchandising plan that is in play at Kings Plaza.

  • We've already announced that Primark is coming in and going to build a flagship store there, and we think they are really perfect for the market.

  • We have five or six other major users that we are in various stages of conversations with to take up pieces of the remaining space that was previously occupied by Sears.

  • And I am absolutely confident that when we announce the final lineup of merchants that's going to replace Sears, and more importantly, when we actually get them open for business, you're going to look back on that and say, wow, what a transformation; what a success that was.

  • Moving away from King Plaza, as I've indicated in the recent store closings for Macy's and Sears, we had one that we anticipated and that's what we got.

  • Look, when I look at the portfolio that we have, both from the ones that you might suspect might be closing stores or even if you just take a look at the overall picture, we are in a very good position to take and have the ability to recycle anchor boxes in our portfolio.

  • Our portfolio, as well as the entire US mall industry, is over-concentrated in square footage that is dedicated to department stores compared to what is needed and compared to what the global standards and benchmarks are.

  • The whole reason to bring these department stores into these centers 50 years ago was to create traffic and it was the traffic that they would bring that gave us the ability to lease the small shop space.

  • So as these department stores rationalize their store fleet -- which I would maintain that if they do it in a smart way that they could do what we have done, which is basically to improve their portfolio and redeploy that money into our core portfolio and end up with a stronger business.

  • But as I think about it, it is definitely, for us, an opportunity going forward and I think we're in a terrific position to capitalize on that opportunity.

  • And I do think that as certain anchors go away we will bring in nontraditional types of traffic generators, whether it be restaurants or theaters or sporting-goods operators, grocery stores, entertainment complexes.

  • Things that generate traffic that take advantage of the regional and, in many cases, the super-regional location.

  • Again, one of my peers has been very good about bringing home the point that if you ask a whole bunch of retailers in the world that traditionally don't go to malls if they want to come to a mall the answer is -- they're going to come back and say, no, I don't want to go to a mall; I don't go to malls.

  • And then if you ask them a different question; say, look, do you want to do business in this particular city?

  • They say, okay, yes.

  • If you want to do business in this particular city, would you like to be located in the single-best location from a viewpoint of arterial car traffic, transportation, infrastructure, and co-tenancy in the entire market, then the answer would always be yes.

  • Look, that is the challenge, if you will, at bringing in some of these non-traditional retailers into the malls, but it's something that clearly our peers and we are going to be focused on.

  • Again, this just simply brings us more in line with global merchandising models.

  • Paul Morgan - Analyst

  • Okay, thanks.

  • Operator

  • Steve Sakwa, Evercore ISI.

  • Steve Sakwa - Analyst

  • A couple questions, maybe start off with Bob.

  • The 5.3 years that you mentioned as the average lease term, I guess I would have maybe thought it's a bit longer.

  • Has that number sort of been trending lower?

  • Has that number changed meaningfully over the last, say, year or two?

  • Then, secondly, what percentage of your overall annual leasing would be captured in your re-leasing spreads?

  • Robert Perlmutter - Senior EVP & COO

  • To answer the first question, the fourth-quarter average lease term was lower.

  • The previous quarter I believe it was seven years.

  • And, as I mentioned in my comments, we had a fairly significant group of package renewals and many of those leases were shorter in nature, either at our request or the tenants' desire.

  • But it was really impacted by some of these package renewals, so I don't think we are seeing anything -- trend change as much as just a package in the quarter that was different than the historical package

  • Then, secondly, we capture pretty much everything in our spreads under 10,000 square feet, so that's -- my gut is somewhere between -- it's probably about, in terms of total aggregate volume, 35% plus or minus.

  • The rest would be stores over 10,000 square feet.

  • Steve Sakwa - Analyst

  • Okay.

  • I guess, Tom, I just want to make sure I understand the disclosure you have got on page 30 in the development pipeline.

  • When you talk about Kings and the 4% yield on that project, you basically are saying you lost $10 million in rent, you're going to spend $100 million to redevelop that, and you're basically going to get back effectively $15 million, so kind of the 4% incremental over the 11.

  • Is that the way to think about that?

  • Tom O'Hern - Senior EVP, CFO & Treasurer

  • Steve, the $10 million was rent and charges, so about half of that was property taxes, CAM charges, things like that.

  • So it's not the full $10 million; it's more like $5 million or $6 million is the part that actually hits NOI.

  • Steve Sakwa - Analyst

  • Okay.

  • But I guess I'm just trying to think through the overall return.

  • I mean it sounds like you gave up rent of $5 million to $6 million.

  • You're now spending $100 million.

  • That $5 million to $6 million may then go to $10 million.

  • I guess I'm just trying to think how you assess these boxes, taking them back on what kind of is an appropriate return to get on that incremental capital.

  • Art Coppola - Chairman & CEO

  • I'll answer what is an appropriate return.

  • Look, if we -- and I know that I may be in a minority here, but I will say that if -- let's assume that, and I will pick a round number of 4% to 5% type of cap rate, 20 to 25 type of multiples, is the way investors view the value of our malls.

  • If we can re-merchandise a department store location across the board -- and now I'm not talking about one location, I'm talking about many locations -- and we can generate returns that are in that mid-single-digit category and end up with retailers that are more complementary and generate more traffic for the benefit of everybody, which creates higher productivity, higher rents, and higher EBITDA, I'm going to do it every day of the week.

  • I'm not the guy that is going to sit here and tell you that remerchandising department store boxes is going to generate the same types of returns that one can generate on ground-up development opportunities or on massive new expansion opportunities.

  • For our money, I am very happy to receive a mid-digit return on new capital if I can dramatically improve the quality of the anchor; come in with a new idea that's something that generates a lot more business and prolongs the sustainability and the energy of the center in question.

  • I know that I may be in a minority on that, but that's the way I feel as to what is an acceptable return.

  • Is it appropriate?

  • I don't know.

  • Is that acceptable?

  • Absolutely, all day long.

  • Steve Sakwa - Analyst

  • Okay, thanks, Art.

  • If I could just maybe ask one more follow-up to Bob; just in terms of all the space that maybe you are taking back from some of these bankrupt tenants and you think about the different categories that you could re-lease to, I'm just curious how much of it is apparel-driven and how much would be food, entertainment, other uses that are either new to the mall or just kind of expanding the mall offering.

  • Robert Perlmutter - Senior EVP & COO

  • I'm not sure that I could give you a good answer in terms of changes in categories.

  • We have seen our food grow over the last 10 years; I think it's about 10%.

  • We have seen the apparel stores migrate to larger boxes from smaller boxes.

  • We have seen certain categories like health and beauty, athletic footwear, many specialty retailers expand, so I'm not sure that I have a really good formula to tell you what is changing.

  • I will tell you there's retailers in all the categories who are expanding and there's retailers in all the categories who are stable and there's retailers in all the categories that are contracting.

  • Art Coppola - Chairman & CEO

  • I would just add to that, Steve -- and you have, I believe, a research partner that has provided some pretty good commentary on this -- look, the traditional department store over the years was, let's say, I don't know, 95% apparel one way or another, soft goods.

  • As those people shrink, the apparel that used to be sold within the four walls of that box is definitely going to go down, dramatically.

  • And we are definitely going to replace what was predominantly an apparel reseller -- and I want to use that phrase in the same context that a retail analyst would use it -- with uses that are not apparel, but generate a lot of traffic and generate higher returns for us.

  • It's just the evolution of the business model and it's a good evolution.

  • So definitely less apparel.

  • Steve Sakwa - Analyst

  • Okay.

  • Thanks, guys.

  • Art Coppola - Chairman & CEO

  • Thank you very much for joining us on the call and we look forward to seeing you all in the near future.

  • Thank you.

  • Operator

  • Ladies and gentlemen, that does conclude today's conference call.

  • Thank you for your participation.