Macerich Co (MAC) 2017 Q1 法說會逐字稿

Good day, and welcome to The Macerich Company First Quarter 2017 Earnings Call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Jean Wood.

Please go ahead, ma'am.

Thank you for joining us today on our first quarter 2017 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 a variety of risks, 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 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; 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'll be limiting the call to 1 hour.

If we conclude and you still have questions, please feel free to call me or John Perry or Jean Wood.

For the quarter, FFO was $0.87 per share compared to $0.87 for the quarter ended March 31, 2016.

This number was slightly ahead of our guidance range, which was primarily due to the timing of lease termination revenues.

Same-center growth and NOI, excluding straight-line rents and SFAS 141 income, was up 2.2% for the quarter.

We have forecast same-center growth for the year to be in the range of 3% of 4%, and we are still comfortable with that range.

We did expect the first quarter and second quarter would be the lowest quarters due to significant decline in occupancy, roughly 80 basis points, resulting from the high number of tenant bankruptcies in the first quarter.

The gross operating margin for the quarter was 68.4%, down slightly from 68.6% in the first quarter of last year.

Occupancy declines were the primary reason for this decrease.

Bad debt expense for the quarter was $1.6 million, up slightly compared to $1.2 million in the first quarter of last year.

Lease term fees were $2.7 million for the quarter, down compared to $3.5 million for the first quarter of 2016.

During the second quarter, the average interest rate was 3.57%, very comparable to 3.62% a year ago.

Looking at the balance sheet.

It continues to be in very good shape.

At quarter-end, debt-to-market cap was 43%.

The interest coverage ratio was 3.8x, which is the best in our history as a public company.

The average debt maturity is also very strong at 6.2 years.

We do not have much in front of us in terms of loans maturing in the next 2 years, with only $99 million maturing this year and $338 million in 2018.

The financing market remains good for us, even as rates have increased and now come back down.

The borrowing spreads decreased, and we were able to do 10-year fixed-rate loans at less than 4%.

For example, in March, we refinanced Kierland Commons.

We closed on a $225 million loan at 3.97%.

The underlying treasury at the time was about 2.50%, which meant that the spread of the treasuries contracted as rates have gone up.

The prior loan was a floating rate loan of $130 million with a 2.6% interest rate.

During March, we utilized $140 million of sale proceeds from the sale of Northgate Mall, Cascade Mall and the office building at Country Club Plaza to buy back 1.5% of our shares, 2.2 million shares.

The average buyback price was $64.18.

In the earnings release yesterday, we've reaffirmed our estimate of EPS and diluted FFO per share guidance for 2017 in the range of $3.90 to $4.

Included in the guidance is $0.08 of dilution from the sale of Northgate, Cascade and the office building at Country Club Plaza.

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

Other major assumptions include same-center NOI, as I mentioned, in the range of 3% to 4%, and that remains unchanged.

Lease terminations for the year are estimated at $15 million.

We originally forecast that revenue primarily to fall in the third and fourth quarter.

As noted previously, some of that $2.7 million did hit in the first quarter, and we expect that we will recognize some more lease termination revenue in the second quarter as well.

Negatively impacting FFO in the first quarter was a write-down of a technology investment, which after the tax effect had a negative FFO impact of about $6.5 million or $0.04 per share.

In early February, we were concerned, although not certain, about the long-term viability of this investment.

Accordingly, we did consider it in our original guidance.

My last comment on guidance is that, although we expect about $0.03 of accretion from the share buyback, we are not adjusting our guidance range at this time, but we will take another look at it after the second quarter results are in.

And with that, I'd like to turn it over to Bob.

Thanks, Tom.

First quarter results within the Macerich portfolio reflected a negative impact to occupancy caused by the recent tenant bankruptcies.

Despite these headwinds, our high-quality centers continue to produce strong leasing spreads.

Sales for the portfolio increased to $639 per square foot.

Our trailing 12-month leasing spreads decreased slightly to 17.5% from the fourth quarter rate of 17.7%.

Leasing spreads continue to be strong as at the top tier centers.

Within the portfolio, the top 30 centers generate sales of $739 per square foot and represent 80% of our annual net operating income.

This performance provides a high degree of stability in the current environment.

Average rent for leases signed during the trailing 12-month period was $56.93 per square foot, up marginally from the fourth quarter.

During the first quarter, a total of 601,000 square feet of leases were signed, representing a decrease from the first quarter of 2016.

New tenant leasing activity was consistent with the prior year.

The average term for leases signed in the first quarter was 5.2 years.

Apparel, shoes and jewelry represented 40% of the quarter's activities, while food and restaurants were 21% and cosmetics, health and beauty were 17%.

Occupancy at the end of the first quarter was 94.3%.

This represented an 80 basis point decrease on a year-over-year basis.

Store closures from tenant bankruptcies during the first quarter accounted for a 50 basis point decline in occupancy.

Temporary occupancy ended the first quarter at 5.3%.

Portfolio sales ended the first quarter at $639 per square foot, which represented a 2.2% increase on a year-over-year basis.

On a same-center basis, trailing 12-month sales were $641, which represented a 1.9% year-over-year increase.

I'd like to next take a couple minutes discussing bankruptcies by reviewing the activity over the past 3 years.

At the beginning of 2014, our current portfolio of centers had a leasing level of 95.4%.

We ended 2016 at 95.6%.

Effectively, our total occupancy did not change over the 3-year period.

But during the same time period, a total of 33 retailers located in these centers entered bankruptcy.

These stores represented 255 locations with just over 1 million square feet, which is roughly 5% of our nonanchor space.

Excluding the Sports Authority spaces, approximately 450,000 square feet or 55% of the square footage was closed and liquidated.

These closed tenants had an average base rent of $47 per square foot at the time they went into bankruptcy, and they generated sales of only $253 per square foot.

The sales were less than 1/2 of our center averages.

To date, average base rent of $51 per square foot has been achieved on the re-leasing of this space.

Equally as important, we've been able to replace weak retailers like Love Culture, RadioShack, Cache, Wet Seal and Coldwater Creek with more contemporary retail concept that include Anthropologie, Timberland, vineyard vines, UNIQLO, adidas, Soft Surroundings and H&M.

These tenants improved the draw of the individual properties and should generate sales at or above the portfolio average.

Bankruptcy activity at the beginning of 2017 has remained elevated.

Today, we have 9 retailers who have declared bankruptcy, totaling 69 locations with 342,000 square feet.

These spaces had an average base rent of $47 per square foot and generated average sales of only $226.

Clearly, the low productivity of these stores has been the primary reason for the bankruptcies.

We expect 2 additional retailers to announce bankruptcy during the second quarter.

It is clear the leasing environment remains challenging.

The quality of the portfolio provides great stability as retailers continue to seek out must-have retail locations.

The bankruptcy of weaker retailers presents challenges for the leasing team.

However, there's also an opportunity to improve already strong assets.

In dealing with these bankrupt tenants, we try to make the right long-term decisions for each property, even if the shorter-term metrics are impacted.

The redevelopment of the former Sears box at Kings Plaza is well underway and scheduled for a fall 2018 opening.

In addition to the previously announced anchors of Primark and Zara, we are completing deals for 2 additional retailers that will occupy the balance of this space.

We expect to make announcements once the leases are signed.

Fashion Outlets of Philadelphia is proceeding with reconstruction and also scheduled to open in 2018.

Retailer interest continues to grow as the development and investment in Downtown Philadelphia provides a unique opportunity to recreate and reimagine 3 city blocks around the city's transit hub.

In conclusion, despite the headwinds of specialty store bankruptcies, our portfolio remains exceptionally strong and well leased.

The replacement of lower-productivity tenants within our centers has been consistent with the evolution of new retail formats for many years.

Leasing spreads remain at historical levels, and demand remains strong as illustrated by maintaining our occupancy despite over 1 million square feet of bankruptcies over the last 3 years.

We continue to believe the premier A centers that compose our portfolio will increase their market share and importance in the omni-channel distribution of retailers' goods.

And with that, I'd like to turn it over to Art.

Thanks, Bobby.

Thanks, Tom.

I just want to follow up a little bit on what Bobby just spoke about regarding specialty store closures.

As I look at it, when I asked Bobby and Tom to take a look at all of the closures that we've had -- could have gone back over the history of mankind for the last 41 years, but we took 3 years.

And I look at that.

There were a tremendous number of amount of square footage that went through bankruptcy.

But that's not unusual.

That is something that is the way of the world.

I would say that, as pointed out by one of my peers, some of those bankruptcies were maybe accelerated due to the retailer being burdened with too much debt.

And that was part of a private equity firm's ownership of that retailer.

But as Bobby pointed out, at the end of the day, it was really because they were lousy retailers.

That's why they went broke.

And the definition of a lousy retailer is somebody who doesn't produce.

Bobby mentioned the numbers of these retailers did $250 a foot.

So being the eternal optimist, frankly, I see bankruptcies as being a blessing in disguise because it takes a tenant who is occupying a space and producing no business and gives us back the space earlier than the normal expiration of the term so that we can go ahead and do what we do every day, which is to take space and to recycle it into more up-to-date ideas and uses and concepts.

And if you look at it from a macro viewpoint, over the last 3 years, from December of 2013 through March of 2017, our occupancies were the same.

We had, I think Bobby mentioned 1 million square feet of retailers go through bankruptcy.

During that little over 3-year period, the average base rents in our portfolio went from $41.88 a foot to $56.31 a foot or an increase of 34%.

Total sales of all of our shopping centers that we own today compared to what we owned December of '13 went from $562 a foot up to $639 a foot.

And if you just look at our top 40 centers, they went from $6.04 a foot to $ 662 a foot.

The percentage of NOI that we get from our top 40 centers increased from 89% of our total EBITDA 3.5 years ago to over 93% today.

So my takeaway is that the bankruptcies of the last 3 years helped us improve our portfolio, helped us bring in tenants at better rents, better ideas and at higher productivities.

Those are what the macro numbers say, and that's what you see if you walk our malls.

I will point out one thing that I think Bobby mentioned, which some of you may or may not have picked up on, he talked about some of the new leasing deals being done at $51 a foot.

You might ask yourself the question, "Well, gee, if your average ABR is $56 a foot, what's going on?" Well, what's going on is that the guys who go broke are generally guys that aren't that good in the first place.

And so therefore, we put them in the weaker spots at the center that don't command the average base rate of the center.

So -- and by the way, that explains -- when I look at the makeup of the retailers that are going broke this year, and that might go broke, they pretty much all fits the same profile.

They've been dead man walking waiting to die.

And this just accelerates the process so that we can move forward.

I want to talk about a point that -- moving away from leasing, that Tom mentioned, regarding the write-off of that private investment -- nonreal estate investment that we had, and I know that at least one of you on the call will likely ask questions about that.

As all S&P 500 companies do, we use venture capital investments as a way to stay abreast of what's happening amongst the disruptors and start-ups in our world as well as to incubate new ideas and to find new technologies.

Over the last couple of years, we've made about 8 investments totaling about $18 million into various ideas.

Some of them are pure retailers that are about to open, say, their first, their second, their third full store.

But the one that caused the write-off was a different one.

It was a large investment.

It was $10 million.

And it was into a platform that was designed -- and the thesis behind the company was that they were going to essentially be a facilitator for digitally native retailers as well as European retailers to open stores in the U.S. And they've built up a tremendous amount of overhead to support that idea, but they really built themselves as being the bridge between clicks and bricks, which had it turned out to be that, it would have been a wonderful business.

And it would have been a terrific thing for us to use to bring new ideas and new concepts to our malls.

As Tom mentioned in early February, there were issues regarding that, and it turns out that the company failed.

Look, we've had some takeaways from that.

We realize that we've made too big of an investment into one company.

But the other takeaway was that we are going to be best served to have us be the facilitator for clicks coming to bricks and not think about third parties being the ones to get in the middle of that.

We've been very successful in our early efforts on that.

And a couple of our metro investments have been in early-stage investments and some exciting retailers like B8TA, Ministry of Supply, each of which have got a couple of locations open with us and door 4, 5 underway and provide exciting stores for us.

Going on a couple of other topics.

You may have noticed in the development pipeline that we moved out the Candlestick project 2 years.

That's completely driven by the fact that we are partnering on that property with the master developer that controls over 1,000 acres or so in the area, including Hunters point.

And you can well imagine that when we're dealing with a 1,000-acre development in a city like San Francisco, that there are going to be delays in the implementation of the infrastructure, et cetera.

We thought we were going to be able to still maintain the schedule.

But as we look at it, the realistic opening is what we put out there now.

Leasing, pre-leasing is very strong.

It's a tremendous location, and we're very bullish on the opportunities there.

One final point that I want to touch upon, which has been touched upon ad nauseam, but unfortunately, still appears to be in the drinking water that's poisoning the sentiment around public investors and their views towards A mall companies.

I will stipulate that the U.S. is over-retailed.

I will stipulate that the U.S. has too many department stores.

I believe that as department stores shrink their fleet, as they see some Penny's have, that, that is a fundamentally good move for Macy's and Penny's.

I've said it dozens of times.

My peers had said it dozens of times.

This frees up capital for them, hopefully, but for them to focus on that capital, and more importantly, their top merchandising resources on their best stores.

As I think about and we look at -- if each of them were to reduce their fleets by 35% or 40% or 50%, first of all, very few, if any of those stores would be in our portfolio because of the quality of the portfolio that we have.

And secondly, if it's good for them, it's good for us.

We're in the middle of a significant rationalization in the retail industry.

This is good for the haves.

It's bad for the have-nots.

It's an environment where the rich are going to get richer.

The poor are going to get poorer.

But look, I am absolutely convinced that the top 20% or so of the malls -- and I could say the top 50%.

But let's say a safe number that, hopefully, most people would believe is arguable.

Say, 20%.

They have a place in the future.

Well, that's exactly where over 90% of our EBITDA comes from.

I mean, can you imagine for a minute that the anxieties that public investors have over the disruption that they think is happening with Amazon and e-commerce, can you imagine that resulting in major retail stores on Fifth Avenue in New York or Michigan Avenue in Chicago or any other great high street going away?

I mean, if that happens, look, the world is a different place.

And if that happens, we really are going to have to think about a complete recycling.

I'll even take another step and tell you that in that environment, I would like to have tremendous real estate.

And that's what we have.

We have real estate that has the densest population within a short trade area of any of our peers and certainly well positioned.

And they're in gateway cities.

So we're well positioned for anything that comes our way.

And believe it or not, we're optimistic.

With that, I'd like to open it up for questions.

(Operator Instructions) And we will take our first question from Craig Schmidt with Bank of America.

Thanks for the information on outlets in San Francisco.

I'm wondering about the other 2 projects in the shadow pipeline, Paradise Valley and Westside Pavilion.

Is the -- there's continual place on the shadow pipeline.

Does that have to do with still you're trying to figure out what you want to do?

Or are you just waiting for more opportune time to proceed with those redevelopments?

Clearly, on Westside Pavilion, we are weighing 3 or 4 significant ideas.

We need to get possession of one of the anchor locations there to proceed on any one of the 3 or 4. We are -- and they really -- they go 180 degrees on the spectrum, where there's one idea that's all retail.

There's another idea that has no retail, and there's another idea that has some retail and some other use.

And you can tell I'm being careful about talking about what that other use is.

At the end of the day, it kind of fits into that bucket that I talked about with the Armageddon bucket, where, let's just say, the whole world comes to an end for retail, okay?

That's fine.

If that happens, I want to own some great real estate.

That real estate will be more valuable on a cost-adjusted basis.

I'm including any capital that might go into it.

When it gets redeveloped, I would bet anything.

It would be more valuable than it was at its heyday as a retail project.

Paradise Valley, that's a rounding error.

It's great real estate.

It's underperforming.

And the shops, it's really bizarre because the department store is ranked kind of in the middle in any one of those departments -- you know, they've got 6 department stores there, 6 anchors, which tells you the anchors are not necessarily a proxy for success.

And the anchors, some of them got, like, #3 or #4 store out of 8 or 10 stores in the market at that center.

But the specialty stores can't get arrested.

So there's a situation where we're kind of hostage to getting that possession from 1 or 2 of the department stores so that we can start dephasing.

My guess is we're not going to be the one to actually do that project because it's not that compelling, but it's fundamentally great real estate.

It's the highest-wealth ZIP Code in Arizona, maybe even the Southwest.

But we need to get back a box or 2 in order to move forward, and we're hostage.

We can't get them back.

We can't get them back from the department stores.

Great.

And then maybe just an update on the Seritage JV?

Well, just to remind, that is a joint venture between us and Seritage and 9 Sears stores and 9 parking lots at 9 of our malls.

To date, yes, I don't know -- what kind of update would you like to hear?

I just wonder, are you going forward with taking over 100% of that space?

Or are you still looking to do 50-50?

I never was looking to do 50% recaptures from any of the Sears stores.

It was done in the early phases that I think it was a great move to put Primark into half or so of the Sears box in Danbury and Freehold.

And that's fine, that was a good idea.

But honestly, I don't see the economics makes sense to recapture 50% of any of the other 7 locations and effectively pay Sears to then shrink into the other half of the space.

Because a, it costs too much money to do it.

And b, ultimately, you're kicking the can down the road so that if and when Sears does fail, that the opportunity to redeploy the other half probably doesn't make a lot of sense.

So at this point in time, I really don't see anything happening on the development front on any of the other 7 boxes.

Our next question will come from Wes Golladay with RBC Capital Markets.

Looking at your center, you mentioned the dead man walking, probably the low-productive tenants, $200 to $200 a foot.

Can you talk about the demand you have weighed to get in the center?

Is it enough to throw a ball these low-quality tenants that are just there because you have a lease with them?

Yes.

This is Bob Perlmutter.

Obviously, the leasing of these spaces is not different from the leasing of any of the spaces in the center.

To the extent that there is a stronger productivity mall, there's going to be more demand.

In the lower-productivity mall, there's going to be less demand.

I think the real key on the lower productivity centers is really changing the nature of who you're going to re-lease the space to.

Many of these tenants we're built on a model that the more stores you have, the more productivity you had.

And they tended to be 2,500 to 4,000 foot tenants who really traded off the foot traffic at the mall, traded off of.

And what we're seeing on the lower-tier centers is often the best opportunity is to aggregate the space up and look more at box uses or uses that were typically outside the mall as opposed to inside the mall.

So again, at the higher-productivity center, the demand is good.

Whether the tenant went bankrupt or the tenant wasn't renewed in expiration, it really doesn't change the discussion.

At the lower-tier centers, I think you'll see a change in the nature of the tenant, and it will be larger-format, more discount-oriented tenants.

Our next question will come from Jeff Donnelly with Wells Fargo.

First question, maybe a little bit of a 2-parter.

I guess, Art, I was just curious, the Sears have thrown out -- they might look to dispose of another tranche of stores.

I'm curious, is there other opportunities for Macerich to reach for transactions of anchors?

Or do you think you're kind of done with that at this point?

And I guess, maybe related to that on the acquisition front, are there deals that might be in the marketplace that you think could sort of reveal pricing for sort of A or better than A quality malls?

The Sears stores that were offered for sale recently, none of them were in our malls, so we wouldn't be interested in any of those.

As far as any -- the opportunity to acquire department stores from department store operators, there are a number of department stores that I would love to get back from -- I can name, in my head, 1, 2, 3, 4, 5 different names.

There are 5 different names that each of them had at least 1 department store I would love to get back from them.

And we're in various stages of conversation around that.

As one of my peers said yesterday, the opportunity to make a lot of money on taking not only the square footage but the land that these department stores were given 30 years ago to help create these malls and to repurpose that land into today's use and they help us really position these centers for the 21st century, it's a huge opportunity, especially when you're in high-population trade areas in gateway cities.

As far as on the acquisition front, I think I may have even talked about it or alluded to it earlier.

One of the reasons that private market values are still so strong is that the great malls and retail locations that are out there are in the hands of strong people that just have no interest in selling them.

And yet, the demand to invest into those malls, either to buy them or to joint venture them, just keeps growing as the sovereign capital sources of capital of the world get more educated about the space.

Look, we were really lucky last year to buy Country Club Plaza with the Taubman organization, which is going great.

But I don't see any acquisition opportunities for us in the near term.

Having said that, every time I say that, there are sometimes -- Ed surprises me, but I don't see it.

And just maybe one other question on a -- I'm just curious you rely on tenant improvements.

If pressure is on -- and maybe this doesn't apply to your malls, and maybe just all malls but if pressured down sort of unit level store profitability are accelerating and ultimately kind of shortening the life cycle of some retailers or increasing tenant turnover, is it fair to say that, in the mall industry, we're going to agree to expect the landlord you're going to have to chip in more dollars more frequently for TIs going forward?

Do you think it's going to be one of the big shifts, if you will, in the mall space?

I'm not sure that's going to be a huge shift, but I think clearly capital is part of the discussion.

As you know, in our business, it's very rare that, on renewals, a tenant will receive any tenant allowance or concessions from the landlord, especially at the better centers.

So you're really talking about capturing new tenants.

And I think, as you see, either tenants earlier in their development stage of their store fleets or tenants only looking for the prime locations or the nature of bringing in more food and other nontraditional uses into the center, I think it's likely that the capital structure could be different.

The rent will hopefully reflect that difference, but I don't think that there's going to be a significant change in our tenant improvement cost.

And I don't think our financials show a significant change either.

In fact, what's happened, Jeff, over the last couple of years, it's trended down.

Last year, 2016 was lower than 2015.

And year-to-date, we're trending lower than 2016 was.

So in actuality, we're funding less in terms of tenant allowances than we have in prior years.

Having said that, Jeff, I have to add that there is one area where tenant allowances will go up.

And that's not the defensive area.

That is in the offensive area.

As I've gotten to know a lot of these digitally native retailers and the company has gotten to know them, it's clear to me that -- when they're ready to fund their real estate rollouts, they're funding those rollouts with equity capital from venture capital firms is really a terribly expensive way for them to fund their rollouts.

So we have talked to some of these digitally-native retailers.

And said, "Look, we'll help you with some of your build-out, give you a little bit more than we normally would give to a new tenant.

In return for that, we want to share in the reward to the extent that you do well." So as we embrace more and more kind of start-up, digitally-native types of retailers, we are going to offer them more tenant allowance than normal to bring them into the center, but we're also going to get paid for it in the way of a variable rent structure.

And our next question will come from Alexander Goldfarb with Sandler O'Neill.

Considering on the investment team.

If we can just go back to the write-off.

You mentioned 2 stats.

You mentioned one, $10 million that you wrote off, but then you also mentioned that there are 8 investments for $18 million.

So I'm guessing that the $10 million was incremental to the $18 million.

But if we could just get a color...

No, no, no.

$18 million is the total.

$10 million is was part of that.

So you could think of it that we have $8 million invested at another 8 different ideas.

Okay, okay.

And then could you just (inaudible)

You always assume the worst, Alexander.

We never do.

In retailing, we never assume the worst.

So then questions for small investments mature.

But just -- can you give a sense for sort of $1 million in a venture like how that helps the venture and that what sort of opportunities are these?

Are they operating businesses?

Are they just a few folks that have coffee shop trying to make something a go of it?

Just give a little bit more flavor.

Yes, no, I mean, these are early-stage series B type of investments.

So and it's usually with a digitally-native retailer who has big aspirations to establish a brick-and-mortar platform on a national scale.

And we're looking to find these people like -- where some are after they opened their first store but before they've opened their 20th store.

And so we are taking positions in not only the enterprise, but also becoming a distribution channel for them so that we can help them and nurture them as they grow their idea.

We're very selective in what we're doing there.

We've only done a couple of those, but we're going to do more.

Okay.

And then going to Craig's question because you were -- you opened a little bit on Westside Pavilion.

A number of months ago, there was an article that the Macy's box was purchased by a third party.

So when you were talking about the need to acquire a box, one, does it involve this?

And two, how does it work?

If it does involve that, how does it work when you want to do a redevelopment if someone else owns part of that project?

How does it work for maximizing the value?

It doesn't have any impact due to the fact that the third party bought the Macy's box.

We have the opportunity to buy the Macy's box also, we just didn't.

We had a plan for what we wanted to do, and we didn't need the Macy's box to implement that plan.

I think whatever they do with the Macy's box will be a net positive for the property.

I've heard them talk about -- I've heard them talked about residential, which I'm not sure, maybe they'll do that.

But I think the more likely idea is creative office, which will bring a lot of bodies and a lot of lights and for creative office.

The rents in that part of the world are extremely high.

Now we're waiting to -- we need to recapture the Nordstrom box from Nordstrom.

And as soon as we do that, which we have the right to do that, I'm sure it will happen in months, not years, then we'll be able to be more transparent about what we're going to do with the property.

But we're also -- we're still debating it.

We're still debating all retail, nonretail, some retail and some of something else.

All 3 options are good options.

We'll move to our next question from Vincent Chao with Deutsche Bank.

Tom, I just want to go back to the guidance for a second here.

So a $0.03 benefit from assumed buybacks so far.

No more dispositions contemplated.

But presumably, they are low -- share buybacks as well contemplated going forward.

But I guess, with the other parts of guidance being held constant, is that just (inaudible) you waiting to see how the rest of 2Q shakes out?

It sounds like you have visibility on 2 additional bankruptcies, but is there a concern there might be much more than that?

Or is the -- are the discussions you're having suggesting that there's a couple more in the bubble there?

Well, Vin, obviously as you listen to Bobby's section today, there were headwinds.

And I think it would be a little premature to start bumping guidance up at this point.

So we'll see how the second quarter goes.

We'll see how the leasing efforts go in the second quarter.

And then we'll take a look at that.

As they said, there's roughly a 3% -- or excuse me, $0.03 accretion from the buyback which happened in March.

There was no effect of that, that really hit the first quarter.

Then we'll take a look at how things look in total, not just that aspect.

But how the leasing is going, how we've absorbed some of the space we've gotten back from bankruptcies.

And then we'll address the range again at that time.

And Vincent, just to add to that since I'm feeling contrarian today with my partners, knowing that a couple of the names that Bobby was referring to, even if they hit the wall, I just can't imagine it's going to cause a change in our guidance.

Okay, okay.

I really appreciate the color you gave on the bankruptcies that you've had so far in terms of the portfolio stats, if you will, the lower productivity.

I mean, I guess, every mall, good or bad, has some proportion of that lower-productivity tenant.

Do you have a -- can you give us a sense of what percentage of the NOI is coming from those lowest-quality tenants maybe in that 250 or lower level outside of the bankrupt ones?

It's a small number.

Look, it -- I'll answer it for you.

My guess is it's between 10% and 15%.

And I'll tell you how I got there.

So if I'm wrong, you'll at least know how I got there.

I think about 1/3 of our tenants do well below our mall averages.

They do around, say, $300 a foot.

I know that the rents those guys pay are not commensurate with what we get on average from the portfolio.

They tend to be significantly below the average.

So up there -- close to half of the average, and they're already in generally lousy locations because, look, people don't just all of a sudden go from being $1,000 a foot tenant to $200 a foot overnight.

They kind of start their life being lousy, but you give them some space anyway and then you tend to give them stuff on the 10-yard line.

So those rents are probably significantly below the average rents.

If I had the -- if you just put a gun to my head and said "If every one of those 30% of the tenants that do well below your mall average" -- by the way, our malls are the same as everybody else's malls.

What hit the wall what would be the impact if they all hit the wall the same day on income?

I don't know.

It's 10%?

15%?

But I'd love to have them all back.

I wouldn't want them all the same day, but I'd love to have them all back.

And we're not getting them back anyway the same day.

So it doesn't matter.

Our next question will come from Todd Thomas with KeyBanc Capital Markets.

Art, back to the technology investment, I guess.

Most of the other investments, as you mentioned, are about $1 million.

And this one was $10 million.

You mentioned as a company that you wrote down was a facilitator for some of the digitally-native retailers.

And clearly, you have the platform and the ability to bring those retailers to your malls, which we've seen.

So what was it that this company was doing specifically?

Was it helping you seek out these retailers or something in terms of the fit-out of the space or something else?

And does the failure of this company or platform cause any sort of problems or delay in sort of the rollout for some of these digitally-native retailers?

No, it doesn't delay.

Actually, it expedites them coming to us.

You know what, it's my mistake.

It's my bad.

I made the investment.

At the time, it just sounded like a great idea.

They were taking e-tailers that didn't want to have a nexus in a state, for example, and they were even offering to stack the stores.

So the retailer will essentially open a store through a store that this company would lease from us.

And this company would even put employees on the floor.

They would put smart mirrors into the location.

It was the store of the future that they were talking about.

And it kind of sounded good, like many failed concepts.

ICSC gave them Store of the Year Award a couple of years ago, which seems to be like the Sports Illustrated kiss of death.

Look, I made a mistake.

I shouldn't have put that much money into one idea.

If it would have worked, it would have been massive, the upside.

It didn't work.

It was a bad business plan.

And I've concluded that the idea of trying to accelerate that process, which was what attracted me to the idea, was that you could literally potentially have several hundred new stores get attracted to your portfolio through this intermediary.

Well, that idea -- that's a pretty nice idea, and the idea of investing $10 million into somebody, taking a chance, taking a risk, that it would work was appealing.

The risk-reward looked to be fine.

Look, the risk was $10 million.

I don't think I'll be making that big a bet again, but the reward was massive had it worked.

Okay, got it.

That's helpful.

And just stepping back a bit, I guess, as we think about the mall business, high-quality shopping centers, Tesla sort of came out of nowhere.

Apple changed the landscape of retail earlier last season.

I'm not sure if there's sort of any one thing out there right now that you're looking at.

But when you sort of think about the business today, what is it that we could be missing that could sort of change the landscape going forward from here?

Is it food and entertainment?

Is there a new concept or category?

Is it the online-only retailers?

What do you think looks much different or really changes things up over the next couple of years?

This is Bob Perlmutter.

I'll start the answer.

I think there's a number of categories, and I put them under the umbrella of how people live their lives.

So we see increasingly interest from whether it's health clubs or soul cycles or that type of tenant or dry bar where the customer is -- has a certain lifestyle that isn't just buying apparel or shoes or accessories.

So more and more, we see these retailers seeking out the mall because of the footsteps and the amenities.

And more and more, we see traditional mall retailers reacting really positively when you tell them, "You did a deal with SoulCycle or you have a deal with Drybar." Because increasingly, it means there's more touches with their customer, and that's what they're really looking for.

So I think you're going to see broadening of uses.

And I think it's going to be more reflective of the customer's lifestyle.

So when we're talking about this in terms of marketing.

Historically, the opportunity was to use marketing to drive people to shop at the center.

And these centers really have to evolve into venues that meet the customer's lifestyle.

And that's where I think, in particular, the densification and the use of mixed use is important.

And the other thing I would just add to that is that -- I guess not that long from now, I'll be able to say, over the past 100 years, but I can say over the last 41 years, I can guarantee you that nothing has changed.

This is a Darwinian business.

The healthy gets healthier and the weak die.

Just look at every one of our tenant rosters from 20 years ago.

Only 2 or 3 of our top 10 tenants that were here 20 years ago are still in business.

And the names that are our best tenants today didn't even exist 10 or 15 years ago.

That's been the way of the world at great retail locations since the history of the bazaars 2,000 years ago.

I'm sorry.

It's true.

We'll take our next question from Christy McElroy with Citi.

Just a follow-up on Vin's question, just to get a better sense for exactly what's in guidance currently.

Bob, you talked about the 9 retailers with the 69 locations.

Plus, there's another 2 retailers you talked about that might file.

How much of that space do you expect to get back this year within your guidance?

And of that space, how much of that will be negotiated lease terminations versus space rejected their bankruptcy?

And then sort of related to that, how do you think about rent re-leased today versus sort of closings in this environment?

Well, Christie, I'll hit the first part of that.

On lease term fees, I mean, that's a negotiation.

It's always an uncertainty in the assumptions in the guidance.

We've got $15 million in our numbers for the year.

That's our assumption.

On average, over the last 6 years, we've averaged about $12 million.

And it's hard to say at this point in the year whether that's going to be too light a number, but it certainly could be, depending on how some of these negotiations go.

And it's always a choice on whether you -- absent bankruptcy, just in the threat of bankruptcy, you can either negotiate for a lease termination fee or you stay with the tenant and you've got rent coming in and occupancy.

Yes.

And I think in terms of likely scenarios, I think we probably have one situation that's going to generate termination fees and one situation that's probably going to be restructuring with some store closings, so some impact but not a complete liquidation.

In terms of how do we approach rent relief, I would say we approach it pretty stubbornly.

We believe that our assets are strong assets.

We believe that rent relief, whether it's via bankruptcy or through a negotiation settlement, is an investment in these companies.

We invest our capital in these companies.

And candidly, there is not a huge list of tenants who have successfully gone through a bankruptcy restructuring and become strong viable tenants in the future.

So I would say we believe in our real estate.

We approach rent really very stubbornly.

We do recognize that it may impact our short-term metrics, which I mentioned before.

But at the end of the day, we're trying to make the right decision long term for these assets.

And if we don't -- if the retailer can't sell us on making an investment in their business, we're not likely to do it.

Okay.

And then just secondly, with the share buyback in Q1.

It was tied to the asset sales you've done year-to-date.

How are you sort of thinking about doing further buybacks at this point?

Would it only be with further asset sales?

Or are you sort of open to doing opportunistic buybacks in the current market?

No.

We've said before, but I'll say it -- and maybe I haven't said it to you all -- I've clearly said it in my boardroom.

We'll match fund those.

It won't be perfect.

But we'll match fund it.

The way we see it, we're selling out of a noncore asset at a fair price to buy shares in a remaining tremendous pool of assets at a significant discount to a fair price.

We'll match fund it.

It won't be perfect timing on the match funding, but we'll match fund it.

Was that the question?

Yes, that is the question.

Our next question will come from Michael Mueller with JPMorgan.

So first, I was wondering, can you talk a little bit about what's been going on with occupancy at Corte Madera?

And then secondly, on the redevelopment pipeline, once you go beyond what's disclosed in the [stock] can you talk about how deep that is?

Bob will talk about Corte Madera, then I'll talk about the pipeline.

Mike, I'm assuming you're talking about the increase in Corte Madera, correct?

Yes, yes.

Yes, we actually had a couple of moves that were made at the center, and let me start with the comment that it's a small center.

So a small amount of square footage has a pretty big impact.

But we actually had a 2-level store that was occupied by Banana Republic, and we moved them out of that store into a smaller store.

And we actually re-leased the majority of their old store, which was primarily second floor space and a little on the ground to Charles Schwab.

So that improved the occupancy of.

And also, Apple expanded at the center.

So those are the primary changes.

It's really been some moving about.

And then the development pipeline, we sit down with our developers every-- periodically.

And we go over all of the good ideas that we have.

Now a lot of the good ideas are a little futuristic.

Some of them are great ideas, but you have to wait for an event to happen, like getting back to department store.

And some of them are just ideas that you think are terrific, but they're just not ready for prime time because you have to get some zoning or whatever.

And when we sit down in those rooms and we look at the different ideas, I'm not going to -- this is not an addendum to our shadow pipeline or a supplement, but just quickly in my head, while I was listening to Bobby answer, I came up with a little over $2 billion of assets that I would greenlight tomorrow if everything was ready to go.

The opportunities are tremendous.

This is the great future of great malls in dense populated areas in gateway cities.

And a big driver of that future is going to be a combination of the recapture of some space from the department stores, but it's also going to be the arrival of autonomous vehicle so that we can adjust our parking ratios to a more reasonable number and densify the properties.

Okay.

And that $2 billion, that's all redevelopment of existing centers?

That's not new ground up, right?

I've got one ground-up outlet property in there that's not a -- it's not listed anywhere.

Yes, I don't know.

It's not a real number.

I said I did it in my head.

It's easily $2 billion.

Please don't try and tie me to it.

We will take our next question from Nick Yulico with UBS.

Art, I just wanted to ask you sort of latest thoughts on the apparel exposure of malls.

If I look at ICSC give stats of 55% of mall GLAs.

Apparel, I'm sure, yours is lower than that.

I think you worked to reduce some of that mix in your malls.

But I guess, the question, I think is, whether you and the industry can bring in enough tenants that aren't apparel to replace that square footage if apparel continues to shrink on inline space?

And whether these tenants in other industries are paying similarly higher rents as the apparel retailers leave that space?

I know furniture stores are -- talked about as growing demand.

They take a lot of space.

The question is do they pay as much rent as the apparel tenants that are leaving?

So when you hear that -- that's a good question.

So when you hear that 55% number, what do you think that applies to?

You think it applies to our mall space?

Or you think it applies to the entire shopping mall, including the department stores?

That's specifically just nonanchor inline space.

That's a baloney number.

It's so false, it's unbelievable.

It never was true.

Never close to being true.

It's just not true.

I think the highest, Bobby, I think 20 years ago, maybe apparel was close to 40%.

But today, it's well under 30% in our portfolio in terms of inline space?

Am I wrong about that?

Yes, I don't know the exact numbers.

It's also, however, they define apparel.

They define it as apparel accessories, shoes, where it's in a broader category.

Ok,so the numbers for you guys, I guess, the question is still, if apparel needs to shrink in a mall and other tenants need to take that place, do the other tenants coming in, are they able to pay the same rent as the apparel?

All I can do, since nobody will believe my predictions, all I can do is look at history.

History would tell you that, 10 years ago, the following names didn't have a lot of square footage.

And today, they're some of our best tenants in our mall: Apple, Tesla, Microsoft, countless numbers of restaurants that we have that draw traffic.

Great names.

And that will be the way of the future.

It's all -- let's do remember -- I know you all think of us as a mall company, but we are a real estate company.

And so even if the mall business model changes, if you have fundamentally great real estate, it will be occupied and it will be healthy, and it will be vibrant.

That concludes today's question-and-answer session.

I would like to turn the conference back over to today's presenters for any additional or closing remarks.

Thank you.

I just would like to say that, 6 months ago, I think on one of the earnings call, I made a big point of saying I feel your pain.

And I don't want any of my remarks today to indicate that I'm not empathetic.

But I'm done feeling your pain.

Look, our view of the future is very positive with rough waters.

We see a significant disruption between not only our view, but some very smart, global sovereign investors of the fundamental underlying value of our business and the value of our real estate compared to the way the public markets have seen the values, and to some degree, we're taking advantage of that.

So I thank you for your participation, and we look forward to communicating with you over the balance of this year.

Thank you.

This concludes today's call.

Thank you for your participation.

You may now disconnect.