Macerich Co (MAC) 2017 Q3 法說會逐字稿

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

Today's conference is being recorded.

(Operator Instructions)

Now I would like to turn things over to Jean Wood, Vice President of Investor Relations.

Please go ahead.

Good morning.

Thank you, Kayla.

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, uncertainties and other factors.

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

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

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

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

Thank you, Jean.

The third quarter reflected continued solid operating results as evidenced by the strength of most of our portfolios' key operating metrics.

For the quarter, FFO was $0.96.

Although that was $0.02 less than consensus, that was primarily due to a $2.5 million income tax expense that related to the sale of our interest in an office building contiguous to our Philadelphia project.

Same-center NOI in the quarter was up 3.1%, so year-to-date, same-center NOI growth is at 2.9%.

Leased term fees were $3.2 million for the quarter, that was down compared to $7.8 million in the third quarter of last year.

Bad debt expense was a modest $700,000 in the third quarter.

Year-to-date, $4.9 million, so that has slowed significantly compared to the first half of 2017.

During the third quarter, the average interest rate was 3.66%, up about 12 basis points from 3.54% a year ago.

Continuing our practice of selling noncore assets, during the quarter, we sold our interest in an office building in Philadelphia for $31 million and recorded a gain of $6.7 million and, as I mentioned earlier, a related tax expense of $2.5 million as that asset was owned and a taxable REIT subsidiary.

The balance sheet continues to be in good shape.

Quarter end, our debt-to-market cap was 48%.

Interest coverage ratio is a very healthy 3.4x.

The average debt maturity is 5.7 years, also strong and that will improve with the financings we're in process of.

Floating rate debt is currently at 18%, but that's also expected to drop after we do our financing program the balance of this year and the beginning of next year.

Rates are still low and for strong malls, the financing market is good.

The following financings are planned to close in October through year-end or possibly the first part of next year.

Green Acres Commons was an unencumbered asset.

We put $130 million bank loan in place that closes September 29.

Freehold Mall, we put a life company loan on that.

That closed on October 19, $200 million, 3.9% fixed for 12 years.

At Santa Monica Place, we have an agreement for a CMBS loan for $300 million that we expect to close in December.

And on Inland Center, we also have a CMBS loan arranged for $88 million that we expect to close in November.

So the net impact of those 4 financings are $391 million of excess proceeds to us.

And the excess proceeds will be used to pay down the line of credit.

So there'll be no increasing leverage as a result of the new financings.

We're also considering financings on the unencumbered assets, Broadway Plaza and Tysons Tower.

And If those happen, they will either be late this year or early next year.

On our share buyback program in the third quarter, we repurchased and retired 742,000 shares of common stock at an average price of $53.

Year-to-date, our buybacks have totaled $221 million, and we've retired 3.6 million shares, roughly 2.5% of our common shares outstanding.

To restate a point that we have made before, we are not levering up to do these buy backs.

We are using the proceeds from the sale of noncore assets.

On October 24, we increased the quarterly dividend on our common shares to $0.74 per share per quarter, a 4.2% increase.

And now, I'd like to turn it over to Bob to discuss the retail environment.

Thanks, Tom.

Third quarter performance met our expectations as sales per square foot rose, leasing spreads were strong and occupancy remains stable, despite the impact of bankruptcies and early terminations through the first 3 quarters.

Trailing 12-month leasing spreads were 15%, which rolled down from the previous quarter, still reflect a healthy leasing environment for quality centers.

Average leases -- average rent for leases signed during the trailing 12-month period was $57.71 per square foot.

This is 2.1% higher than the previous year.

Average base rent within the portfolio was $56.88 per square foot.

This represents a 4.8% increase over the prior year.

During the third quarter, a total of 708,000 square feet of leases were signed.

This brings the total activity during the first 3 quarters to over 2 million square feet.

The average term for leases signed in the third quarter was 5.4 years.

This compares against the Q2 average of 5.9 years.

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

This represented a 100 basis point decrease on a year-over-year basis and a 10 basis point decrease from the second quarter.

As Art has discussed in past calls, the bankruptcy or early termination of lower productivity tenants is an important opportunity to improve the merchandise mix and sales levels by leasing to higher productivity and more contemporary users.

The result is the balancing of short-term occupancy objectives with long-term goals of securing the best and most productive tenant mix, which meets our consumers' needs and improve sale productivity, ultimately leading to the highest rental stream.

This is especially true at our highest quality centers.

Portfolio sales ended the third quarter at $659 per square foot.

This represented a 5.3% increase on a year-over-year basis.

On a same-center basis, trailing 12-month sales were up 3.2%.

The third quarter represented the first period that Broadway Plaza is included in the leasing metrics since its completion in 2016.

When the redevelopment began, sales from Broadway Plaza were equal to $726 per square foot.

Current sales are now $1,278 per square foot, ranking this as the third most productive center in our portfolio.

Specialty store failures moderated during the third quarter with 4 tenants declaring bankruptcy.

Equally as important, during the third quarter, the bankruptcies of True Religion, Rue21, Gymboree and Payless Shoes were resolved through a restructuring of the company rather than liquidations.

Since the start of 2014, within our portfolio, approximately 900,000 square feet has closed from bankruptcies.

Despite these headwinds, our occupancy has remained stable.

During the same period, our occupancy has declined by only 30 basis points.

We believe this illustrates the underlying strength of our assets and the importance of the markets they serve.

Critical to the success in replacing these locations is diversifying from our traditional tenant base by attracting new users and new uses to our shopping center.

New and emerging brands, either digitally native or store based, are being added and offering our customers new experiences when they shop at the centers.

A partial list of brands that had no previous locations with Macerich in 2014 and now have stores, many of them multiple stores operating at our centers, include Aesop, ALEX AND ANI, Amazon Books, Aritzia, b8ta, Ballard Design, Blue Nile, Drybar, Dyson, e.l.f.

Cosmetics, Fry's, Kendra Scott, Monica + Andy, Morphe, Nespresso, NYX, Peloton, Sage, Shinola, SoulCycle, Superdry, UNTUCKit and Warby Parker.

We believe the demand from these emerging brands validates the desire for retailers to expand with brick-and-mortar locations in the premier centers and the gateway markets across the United States.

There are 2 -- currently 2 development projects in process.

In Philadelphia, construction and leasing is well underway for the Fashion District Philadelphia.

This merchandise mix is evolving based on demand from the retailer community.

In response, the development will be a combination of outlets, larger format of boxes, entertainment as well as full priced flagship retailers.

We view this as a very unique opportunity to redevelop 4 city blocks in downtown Philadelphia.

The redevelopment in the former Sears Building at Kings Plaza is proceeding and ahead of schedule.

3 of the 4 spaces are under signed leases.

The lease for this final space is nearing completion.

This will bring the project to 100%.

We anticipate all 4 retailers will open in the second quarter, which is ahead of the original schedule of fall 2018.

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

Thanks, Bobby.

Thanks, Tom.

As you can tell from the facts and our operating results, our company continues to be -- to perform at a very high level.

However, many folks tend to look at the glass as being half-empty instead of half-full.

Why is that?

That's because there's a major negative sentiment that we all know about, about retail, about our sector and about our company.

And after thinking about sentiment, so I looked at the definition of it.

And one of the popular definitions is that sentiment is a thought or a view or attitude based upon emotion, but not reason.

Emotion, not reason.

The facts are that our malls or town squares are in high demand for retailers.

They are places of preference for shoppers.

And they are performing extremely well.

So what creates this negative sentiment?

Well, to a great extent, it is the -- it is social media, social media that is driven by folks that have somewhat of a contrarian, a conflict of interest.

Maybe they are paying stocks.

Maybe they're a hedge fund.

And of course, every time that a retailer goes broke, it's always blamed upon e-commerce as being the reason.

In fact, the reason that tenants tend to fail is because their brand has become irrelevant.

They may be overlevered and, yes, to some extent, digital commerce may have accelerated their debt.

In our company -- in our portfolio, the companies that have gone broke over the last couple of years averaged about $250 per square foot.

And they paid rents that are about 40% to 50% below the average rent in the malls in which they had stores.

Look, it's true that retail is being disrupted by digital commerce, but it's usually the retailers that should be disrupted.

As I've said before in my view, and I'll talk about this a little bit later, digital commerce is our friend.

It is a breeding ground for new businesses, and this will be the businesses that will fuel the excitement in our portfolio going forward.

I want to talk a little bit about the broader retail landscape.

Much has been talked about the fact that there's too much GLA in the United States.

That's true.

But why doesn't that bother me?

Our portfolio is over 90% driven by town squares that are -- that represent and that occupy a place in the top 300 malls in the United States.

if you look at those top 300 malls in the United States, you're looking at square footage that is about 0.5% of 1% of all of the GLA in the United States.

And then when you add in high-demand street retail locations and other great retail locations, they occupy a place that is in the top 2% or 3% of all of the GLA in the United States.

That's why we have a very confident view on our future.

That's true that malls are evolving, but that's good.

If they did -- if they were not evolving, then they would, in fact, be true to the social media that the mall is dying.

But great malls in great locations are evolving.

If you think about the way malls were built going back 20 or 30 years ago, the profile generally looked like this.

They were suburban in location.

Amazingly, 100% of the GLA in those properties was apparel.

There was no food in those malls.

There weren't even any public bathrooms in those malls.

There were very few amenities.

There was no entertainment.

There was no mixed use.

They were all bull priced, but they did well.

But why did they do well?

Because they didn't have any competition.

So now its competition has come from the digital landscape as well as from people like Walmart, then going back to Digital Amazon.

These malls did have to evolve in order to survive.

And the ones that are going to thrive are the ones that we own.

These are now town squares, and their profile is they are in urban locations.

A tremendous number of the properties that we own were never suburban.

They were built in the middle of cities.

They are in the last mile of distribution.

They have a lot of food options in these centers.

There's lots of entertainment, location-based entertainment, whether it be theaters or destinations, such as LEGOLAND, Crayola and other themed retailers.

There's a tremendous amount of amenities in the properties.

There are lifestyle uses, uses that are -- such as SoulCycle, Equinox, Life Time Fitness, yoga and other uses of that nature.

There's a tremendous amount of health and beauty in these malls, in these town squares, and there will be more.

We didn't used to have that in the malls that were built 20 years ago.

There's home furnishings and accessories for the home, retailers like Restoration Hardware.

It used to be for home, you had to go inside of a department store.

There's the whole category of athleisure, which didn't exist as recently as 10 years ago.

Inside the malls and attached to the malls, there are sporting goods, which used to be found only inside of Sears.

Today, we have great sporting goods retailers, such as Dick's that occupy space.

There are mixed uses that want to be in these town squares, whether it be office, residential, medical, hospitality.

There are major food users, such as Eataly.

People like specialty food users, like Whole Foods, food halls and grocers.

These centers that we own are the new town squares or the new downtowns, if you will.

They are the preferred homes for the omnichannel, digitally born, vertically integrated retailers that are being born in the digital world today.

So let's talk about the future occupants of these malls, and these are the digitally born, vertically integrated retailers.

We've spent a tremendous amount of time researching and surveying the landscape.

We identified, through a variety of criteria, over 400 digital retailers that currently are doing business that we would like to do business with.

We then engaged with these retailers with an outside research firm and interview firm who would interview the founders and the CEOs of these companies.

And the answers came back that they all want to be omnichannel, which means that they want to gravitate towards brick-and-mortar over time.

They want -- the stores that they want tend to be the types of malls that we own.

They are all brands that are extremely well-defined.

In the stores that they have opened or the -- their expectations for their stores, they average over $1,000 a square foot in volume.

They have integrity to their profit margin because they are vertically integrated.

These will be the tenants that will make our malls exciting.

These emerging tenants will be the next-generation superstars in our portfolio in terms of what they will produce for us, whether it be sales productivity, which will be high.

As a consequence of that, they'll be able to pay rents which are significantly higher than the retailers that are leaving us.

They will generate a tremendous amount of traffic, and they will be the heart and soul of the social network of our malls.

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

(Operator Instructions) We'll go first to Todd Thomas, KeyBanc Capital Markets.

Just first question for Tom.

Just in terms of the balance sheet, leverage continues to tick up a little bit and I was just wondering if you could talk about when to project that to begin heading lower here?

Yes.

Actually, if you had some measure other than debt to market cap, it wouldn't really be moving up, Todd.

We're not levering up to do the buybacks or not to any great degree.

And we do have one asset under contract for sale right now.

When that closes up, we'll probably use it to pay down some debt.

So when we look at most of the metrics, average debt maturity is going to be close to 6 years or higher.

We don't have a lot of significant debt coming due the next few years.

The coverage ratio is as strong as it's ever been at 3.4x.

So I don't get too hung up looking at just debt to market cap.

By anybody's measure, debt to value would be under 40%.

So we're pretty comfortable with where our balance sheet is today.

That being said, we do not plan to lever up to do buybacks, for example.

All right.

And then just a follow-up, if I could sneak one in there.

How much -- in terms of the buybacks, I mean, how much more capacity and appetite do you have to do future stock buybacks from here?

Well, we have an authorization that was announced earlier this year of $500 million and we've...

$220 million.

So we've got just about $220 million.

And one thing we have we said and we've remained true to is that we would only fund buybacks through noncore dispositions, the equity that would come from assets that we deem to be noncore.

In this context, it's usually not retail.

In terms of our appetite going forward, I would say that given our view of our total opportunities within our portfolio, including our development pipe -- our redevelopment pipeline and the appetite to bolster and trade firepower for the future, that our appetite for stock buybacks may diminish a little bit over time.

But we'll be reviewing that literally on a weekly basis with our Board of Directors and others.

We'll take our next question from Craig Schmidt, Bank of America.

Is there any update on your Seritage joint venture?

The update is that we're working well with each other.

We have 9 centers, 9 serious locations together.

And we have a number of ideas that we're continuing to work on together.

And the -- I'd say the plans are advancing nicely.

I think there's more definition to what we see the opportunity to be.

And it appears that our view of those opportunities and, hopefully, our ability to get access to those locations are 100%, may coincide in terms of timing.

We'll take our next question from Wes Golladay with RBC Capital Markets.

I was actually looking at the loan.

You sourced -- would those be existing lenders?

And did -- when the value change or just the value change on those assets?

They were not with existing lenders.

Green Acres Commons was unencumbered and Inland Center is unencumbered.

As I said, one was a bank loan.

One was a life company loan.

And 2 were CMBS.

And really, the loan amount was based on a -- where we view at the most efficient pricing, which is typically between 50% and 60% loan-to-value.

We're not terribly proceed-sensitive when we're rate-sensitive.

Okay.

And then looking at the Westside Pavilion, I see it's still in the redevelopment platform, but it looked like they might have been handed back to a special servicer.

Do you have any updates on that asset?

Sure.

The loan is current.

It has moved over to a special servicer, but that really just means that the special servicer is paying more attention to the loan because it's public knowledge that Macy's and Nordstrom both are going to close.

But the loan is fully current.

And in terms of what our plans are for the asset as the department stores announced their plans, which we've known about for years, it's -- look, it's a great piece of real estate and we've received interest from a ton of LA-based real estate developers as well as other real estate developers that would love to be involved in the asset.

If I had to prognosticate what will happen there, my guess is that within a year or less, we will no longer own the asset because somebody will have an idea to do either a mixed-use or a totally nonretail use there that will likely be the highest, the best use for a great piece of real estate, and that will result in us getting value from it than we otherwise couldn't get in owning it as a retail facility.

So it's a testimony, again, to, here you have a old mall where 2 of the 2 department stores are consolidating to another location and because it's great real estate, there's still a tremendous amount of intrinsic value.

Yes.

And on that point, will there be not a lot of NOI passed to that loan right now?

Today, there's not a lot of NOI.

I mean, I think there's -- those are public numbers, but it's de minimis.

It's less than 1% of our EBITDA.

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

I just wanted to touch base on the same-store guide, 3% to 4%.

Those implied a pretty big ramp in the fourth quarter, which, I think you benefit from an easier comparison year-over-year.

But just curious what the other drivers are for sort of the uplift in -- expected in the fourth quarter.

Yes.

Well, Vin, we're at 2.9% year-to-date.

So to get to the bottom end of the range, you just got to have about 3.2% growth in the fourth quarter.

And as you pointed out, we're going against the relatively easy comp.

Typically, fourth quarter's our strongest quarter in terms of NOI.

We've got a lot of variables that roll through in the fourth quarter, some of which are harder to predict.

Roughly 60% of our percentage rent comes through in the fourth quarter.

Again, that's a little bit harder to predict.

Lease term fees, we're working on a few.

Some of those may happen in the fourth quarter.

Some of them may fall into the first of next year.

That could impact the number.

Advertising revenue, which tends to come in, in the fourth quarter, and there's not a lot of lead time to that, but that's heavily weighted towards the fourth quarter as well as temp tenant leasing.

About 40% of the temporary tenant leasing happens in the fourth quarter.

So there's a lot of variables that could push us within that range on the low side, as you said, 3 in the high side, up to 4 for the year.

Okay.

And If I could ask one more.

Just in terms of the financing, for good malls, you said it was quite good.

As you think about future noncore sales, how will the financing market change with the lower quality stuff?

Well, we really haven't been in that market.

I mean, most of the assets we've got in our portfolio that we would consider financing are A-quality centers, and there's just pretty strong appetite.

In fact, we're very happy to see a strong CMBS market as was evidenced by the Santa Monica Place financing, and that was competing with life companies.

But CMBS came through with the best quote.

So it's good that, that market is there, at least, for high-quality assets.

And I'm really not the right person to ask on B mall financing.

We'll take our next question from Michael Mueller, JPMorgan.

I was wondering, can you talk a little bit about Philadelphia pre-leasing levels?

You've talked about a few different types of tenants who were in there, how the mix is allocated toward those tenants.

And then lastly, for what time frame will it take that asset to stabilize, do you think?

I think we've identified today that there's going to be a mix of types of retailers that are going to be there.

Actually, a lot of the retailers are really excited about the mix and feel this could be kind of a paradigm for the future.

Beyond that, look, we have a partner there, too.

And we would need to coordinate any releasing on actual answers of stabilization, et cetera.

Look, our original prognosis on the center when we did our market research studies was that it was going to be a high producer in terms of sales per square foot.

We still believe that.

But given the nature of the project, I think, we've indicated that we seriously doubt that we will start putting out names and leasing statistics probably for another 4 to 6 months.

And we said that before.

We'll go next to Alexander Goldfarb, Sandler O'Neill.

Just a question and a quick follow-up, if I may.

First on the Broadway Plaza, the redevelopment.

The sales jump that you guys talked about and that's in your supplemental.

How much of that is just merely -- not merely, how much of those from the redevelopment having to a bigger traffic draw within the Canadian-theme tenant base versus REIT getting a lot of new tenants in that cost to higher sales?

So just trying to see if it's more increased traffic versus it's how you tended the project pre versus post as the driver of the increase.

Well, I'm going to let Bobby expound on that, but I would have to say that there's been a tremendous -- the tenant mix profile doesn't look hardly anything like it looked when we started commencement of it.

We tore down the vast majority of the small shop space.

I think what was left were the 3 department stores and a junior anchor, but I'll let Bobby go ahead and mix up...

Yes.

I mean, Alex, I'd say it's really both those factors.

It's, one, the center having a much stronger draw mostly because of the size of the presentation of the small stores.

And then secondly, as Art said, you can literally count on one hand the number of tenants who remained in place through this process.

So we've been able to really reach out and do 2 things.

One is establish the critical mass that's needed to generate higher sales.

Two, we consolidated a lot of the stores that already in Walnut Creek doing high volumes and brought them into the center.

And then lastly and most importantly, I think, is we're offering contemporary brands.

And so while Broadway might be the most extreme example of being able to bring new brands into an existing shopping center, we see it at many of the top center, like Washington Square where, as Art mentioned, we're weeding out the lower productivity tenants and using that as an opportunity to bring in the brands that are stronger and more productive and, ultimately, will generate more income.

And look, we're thrilled to finally be able to share the sales productivity of Broadway.

Look, when we announced this project 4 years ago, some people would've said, "Well, what are you doing screwing around with a successful center that's doing $700 a foot?" We've said, "Look, this is what we do for a living." We constantly think about the future.

We think about, is this -- does this center deserve intensification and densification?

Is the demand here so strong that we could actually consider a complete recycling of it and a significant capital expenditure?

And the answer came back yes.

And that there's a tremendous amount of value to be created by shaking up the applecart.

And we did it.

We spent a significant amount of capital.

But we also believe that given the returns that we've got on that capital that has generated very significant value creation.

We took a center that was doing a little over $700 a foot.

Today, it's doing over $1,200 a foot.

It's more than doubled the shop offering that we had before.

So it's just a huge success.

It's nice to be able to publish the results of that success.

Alex, the only thing I would add is that sales number does not include an Apple store.

So that makes the number even more impressive.

Okay.

And then just a side question for Tom.

You answered, obviously, the demands from Life Co's, banks, CMBS's has remained strong for good assets.

Are the lenders changing the questions they're asking?

When they do the underwriting, are they asking different questions?

Have you noticed that over the past year?

Or has their underwriting and questioning been the same now as it was 5 years ago, 10 years ago, when they underwrite malls?

I mean, they've always done a lot of due diligence in their underwriting, and it hasn't changed.

I mean, they've consistently been appreciative of the income quality of the malls, the credit quality of the tenants.

And we don't see the appetite slowing down at all.

I mean, they read the headlines like everybody else, but they know the fact that historically, with an A-quality mall, the life goes, it never really lost money.

Not many of those assets have ever been turned back to LifeCos and so they continued to have a very strong appetite.

I would say they do their underwriting and due diligence with as much fervor as they always have.

I wouldn't say that it's heightened yet today, just as a result of the headlines.

I mean, they're much deeper than that.

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

Just following up on the same-store question, just beyond -- Tommy, you talked about the seasonal uptick that you normally see in temp occupancy in the fourth quarter.

But last quarter, I think you talked about an abnormal uptick in sort of temporary occupancy midyear, just given the bankruptcy closures and the change in the occupancy mix.

How did that trend in Q3?

And how should we think about maybe the conversion of some of that space to more permanent occupancy by year-end?

I think we see the headline occupancy number, but sometimes miss the nuances that are in the mix there.

So in terms of the Q3 temp occupancy number, it was 5.7%, which is the same as the Q2, so we didn't see any change in the temp number.

I think part of what Tom was referring to is probably more seasonal leasing done in the common areas in the fourth quarter for the holiday, which would not be part of that temp occupancy number.

Sure.

But does that 5.7% contract into year-end?

I don't see it's contracting.

I see it's staying pretty stable.

I mean, if we look historically, that number has sort of ranged from a low of 5% to a little bit over 6%.

So we're a little bit higher than the midpoint.

But it has been pretty stable.

And it clearly is up from the beginning of the year based on the bankruptcies and early lease terminations.

And just to also -- look, part of that is a business and we are getting more thoughtful about that business.

We're beginning to use that flexibility of a short-term lease to give digital retailers an opportunity to open a store with us that hopefully becomes a permanent location.

So I would say that 5 years ago, 3 years ago, it was kind of whoever would come and pay us rent and was reasonable as a space was waiting for a permanent tenant.

Today, we're using it a little bit more as a laboratory and we'll clearly heighten that focus going forward.

So the idea of having a percentage of your portfolio in an experimental mode, which is kind of a new attitude that I have and we have around us, I think, is probably going to be a fixture on our numbers.

And then as time goes on, hopefully, those -- there'll be retailers that will be in those test locations that will gravitate to become permanent tenants.

And I do think that maybe the change in focus also going into 2018 is the rents that we charge for those temporary spaces, we've been, as Art said, more focused on bringing in revenue.

And I think now, there's an opportunity to manage that revenue and grow it better by putting more resources on what we charge these tenants.

Okay.

And then just a quick follow-up.

You mentioned another asset for sale.

I assume you're referring to the office at 500 North Michigan.

When is that expected to close?

What -- how should we think about the proceeds?

And I think you said you expect to pay down debt.

Would that be just a pay down of the line of credit?

I would -- look, we try not to talk about dispositions or acquisitions until they're done.

But that got into the news.

The buyer has a very hard large deposit up, about 7% of the sales price.

That's actually the cash has been released to us.

And there's a closing date that is scheduled between now and the end of the year.

I would anticipate they will close, that they will acquire the property.

And the immediate use of the capital would be to pay down the line of credit.

We'll take our next question from Tayo Okusanya with Jefferies.

Could you talk a little bit about the evolution of the strategy for Philadelphia?

Just kind of like a change from being a pure outlet to kind of more of what you're doing now, how that all kind of happened, whether it was more retailer driven or kind of what you do or whether what kind of market competition driven or what have you.

It was totally retailer-driven.

Just listening to the markets, we had a tremendous number of full price retailers that wanted flagship stores in that location.

And we've thought about the idea of presenting a complete pallette of retailers.

It's a lot of square footage and we decided that it made sense to do it.

So it's demand driven, totally demand driven.

Got you.

That's helpful.

And then if I may just ask one quick follow-up.

In the past week, there's been a lot of just, well, buying of call options on Macerich stock.

I'm not quite sure whether you guys have any insight into that, but you could share with us about that or whether it's just that -- it is what it is.

We have nothing to comment about that.

We'll take our next question from D.J. Busch, Green Street Advisors.

Art, you made the point earlier on the sentiment and then you provided the data point that the retailers that have gone broke over the past couple of years, did about $250 a foot and had below-market rents.

Just taking that a step further, if I look at some of your disclosure, I'll make the guess that the more public -- the more mature or publicly traded retailers probably make up, I don't know, 20% to 25% ballpark of the merchandise mix.

These are the same retailers that have been a little bit more vocal about their struggles.

My question is, similar to that $250 you're pointing to, how is the performance if you were to break it up with those publicly traded retailers?

And then the bigger constituent of the merchandise mix, the ones that you're more bullish on and the ones that are performing well, how big is that bifurcation if you look at that breakout?

That's an interesting question.

Strangely enough, it occurred to me this morning, as I was looking through our supplement, on our top 10 tenants.

I'd say the difference is that, look, the vast majority of our top 10 tenants still have a business to run.

The tenants that have -- that went broke, their brands stood for nothing.

And I would say our top tenants are much better capitalized than the ones that went broke.

I don't have the breakout for you, but yes, it's an interesting question.

Okay.

But when I look at your top 10 tenants, some of those ones are the ones that have gone through a little bit of struggles, but you still feel confident in that top 10, even though it doesn't represent a big percentage of the mix.

We certainly don't have any in the top 10 that is on our watch list.

That doesn't mean that people that are in that top 10 are not trying to manage their expenses.

And as their leases roll over, there may be conversations around the idea of a moderation of rent increases.

We'll go next to Jeremy Metz, BMO Capital Markets.

Art, in your opening remark, you talked about how you're ascertaining these town squares and having a mix of usage.

One of your peers earlier today announced a JV with a large multi-family being one its assets in the Seattle area.

Can you just give us your thoughts about adding kind of this alternate usage, how much mix use or residential classification potential may be embedded in the portfolio?

And then if you have any plan in the near term to capitalize on any of this beyond what we're seeing in the current pipeline.

Well, a lot of it has already happened.

So what I was pointing out was that when malls were built 20 years ago, you just didn't find mixed-use in them of any kind.

They were 100% retail.

And now with the strength of these locations, they are attracting other uses.

One of the uses that I see in our centers going forward, and it won't be a huge square footages, but it could be 5% or so of any given mall, maybe even 10%, would be the idea of integrating co-working into the mall itself, not building a freestanding office building, but taking some of the less desirable shop space in a given mall, maybe a mall that has a little too much square footage in the middle and dedicating it to co-working.

And we are in conversations with a couple of companies in that space who have a very strong interest to do that with us.

And so when I look at the customer that they bring, the age that -- of that customer and the profile of that customer and the rent that they will pay, it's a pretty attractive rededication of space.

So look, we definitely see the demand there for additional residential.

We see medical as being a use that's, in some format, that is going to be reintroduced to these malls.

Going back, unfortunately, I can tell you this, 50 years, malls that were built 50 years ago used to have medical office complexes in them.

I mean, I see hospitality coming in, residential adds a nice place making and can be very profitable.

Really, I bring that more in the context that as lease properties have evolved, they've gone from being single-use, apparel-only to being town squares.

And town squares, which are really the new downtowns, they have multiple uses.

And so that's what we're going to have.

I don't think about it in the context of having 10% of our portfolio being residential or otherwise.

I actually don't think it will be anything near that number.

But look, we'll see.

It's all demand driven.

We'll take our next question from Steve Sakwa, Evercore ISI.

I guess a question for Bob.

Can you just maybe talk about sort of the '18 and maybe '19 lease expirations and just the conversations that you're having with tenants?

And I guess today, maybe what percentage of your business for next year is kind of signed and put away at this point?

So I would say that the conversations that we're having are really specific to the particular tenant or the particular shopping center.

Obviously, the stronger the shopping center, the more favorable the discussions are.

And the weaker the tenant, the more difficult the discussions are.

I would say that clearly, as Art mentioned, the retailers are certainly using the sentiment that's out there to try to drive down their costs through renewals, so there's a little bit more friction on renewals.

We have not seen major changes in terms of the percentage of tenants renewing.

We have not seen major changes in terms of the length of leases.

And we think that reflects a very good quality portfolio.

In terms of where we're at in the business, I would say we're at a similar point in last year.

Again, remember 60% of our business is renewals and most of those come during the first quarter, so they're relatively far along.

But with that said, there's clearly attention with retailers trying to reduce their cost and landlords trying to increase their revenues, and it comes down candidly to the quality of the shopping center.

But that tension has been there and in the face of that, we'll continue to drive strong re-leasing spreads and increasing average base rents in our portfolio.

So you have sentiment, which is an emotion or a feeling.

And then you have the facts.

The facts are the re-leasing spreads are strong and the ABRs continue to grow.

Next is from Caitlin Burrows, Goldman Sachs.

I know it's not a direct relationship, but with the portfolio sales up over 5% year-over-year and the comparable property sales up over 3%, is there a good explanation for why or how the percent rents are down, both on an absolute basis and a percent of minimum rents basis?

I feel like I got this question, so wondering what your response would be.

Well, our percentage rent is not a huge part of the revenue.

And obviously, one of the things that occurs every year is you renew tenants who are paying percentage rent and you roll it into base rent.

So there's a lot of different factors that go into percentage rent.

Clearly, while we have a small percentage of outlets, those centers do have higher percentage rent.

We are able to, on renewals, roll percentage rent into fixed rents with higher-productivity tenants.

And I think the other piece of it is it's a small number, so they'll tend to be more volatile year-to-year.

Got it.

Okay.

And then also just wondering before when you were talking about that they might not be on your watch list, but maybe still asking for lower rents because they're trying to lower their own cost within your top 10.

I noticed that Ascena is not actually on your top 10 list of tenants, but they've obviously put out a plan to try to manage their cost as it relates to rental expenses.

So I was wondering how your conversations with them has been progressing.

Well, that's true in terms of Ascena.

But remember, these tenants have leases, so while they may try to lower their rental structures based on their sales performance, they're not able to do that unless the lease is expiring.

And so the discussions with the tenants tends to be around expirations and renewals.

And that's where, again, it really comes back to how strong a quality center you have.

We're aware of which tenants are weaker.

We're aware of which tenants want to roll back rents because of underproductive stores.

Our job is to find productive stores who will pay more rent.

So the discussions only occur upon their expirations.

And we have a pretty good sense of which ones we need to replace and are working on it.

And again, reflecting the quality of the portfolio, that puts us in a strong a position as possible.

We'll go next to Floris van Dijkum with Boenning.

Tom, some of the other questions I had were answered already, but you brought up an interesting point on the following these e-commerce tenants.

Maybe if you could quantify as to what kind -- what percentage of occupancy or how much occupancy you're going to get from these new e-commerce tenants in next year or in the future in 3 years' time, say.

Sure.

Yes, we've really only scratched the surface.

Since we're in the middle of the World Series, I would say that in the world of bringing digitally born, vertically integrated brands to our malls, we're probably at the top of the first inning.

But we see that this has tremendous legs to it.

I easily could see, over the next 3 to 5 years, that these brands would easily represent 10% to 20% of our GLA of shop space.

We'll take our next question from Rich Hill, Morgan Stanley.

Wanted to just get some updates from you about tenant reimbursement margins and how you're thinking about that.

It looks like your tenant reimbursement margins still were trending up pretty nicely despite maybe a little bit of decline in occupancy.

So was wondering if you're seeing any change in trends there or you think the reimbursement margins can continue to go up.

I don't see that changing, Rich.

I mean, we've quote a fixed CAM number with bumps in there.

And typically, the annual increases exceed our actual increase.

So there is some growth built into the existing leases and I don't see that changing going forward in terms of the structure.

And I think the other side of the equation has been relatively flat in terms of operating expenses.

We'll go next to Linda Tsai with Barclays.

In terms of Westside Pavilion, your discussion was interesting in the context of talking about the highest and best use for different properties and, perhaps, being a candidate for sale.

(technical difficulty) some assets and go to market for...

Linda, you cut out there for a second, Linda.

You're coming in and out.

We're not hearing the question all the way.

Sorry.

Let me start over.

Your discussion of Westside Pavilion was interesting in the context of discussing the highest and best use for different properties and, perhaps, being a candidate for sale.

Do you see more opportunities like this across your portfolio where maybe you have a good asset and -- an asset in a good market, but for different reasons, it might not make sense to be a retail asset anymore?

No, no.

But we've known this about West.

Look, West L.A. has too many malls chasing the same customer and it was due for consolidation.

We knew that Westside was going to be looking at that being part of that consolidation.

We're fine with it, though.

Given that we are sitting on a tremendous piece of real estate, it's recently got the benefit of the train station opening a block away.

It has been -- the path has been cleared for upzoning density on the property.

When all of those things happen to a great piece of real estate, it's quite likely that other users are going to the value that real estate more than a horizontal retail facility.

And we're seeing that in terms of the demand that's coming from, really, a tremendous number of people.

So now that would be it at this point.

We'll take our next question from Ki Bin Kim, SunTrust.

Just a couple of quick follow-ups.

There's some interesting moves in occupancy for some of your centers.

I mean, I won't go through all of them, but it's something like Santa Monica and some others.

Could you provide any commentary on that?

And second part of that question is you've touched on it already, but are you finding that the way you do leasing philosophically is changing a little bit, where it is more act of duration and maybe more TAs to facilitate these e-commerce companies in the short term that might be on the sense of opening stores?

Well, let me try to answer the capital question first.

And again, remember that the capital discussion is primarily driven on the new leases and not the renewals.

And you've seen the historical numbers.

They've been relatively stable.

But it is likely that certain users, whether they're emerging brands or restaurants, have the potential to increase the capital requirement.

The key to structuring those deals is to take a bigger percentage of the upside if they're successful, but that's a small percentage of the leases.

And so because of that, we haven't seen significant changes to our capital requirements.

In terms of certain centers, I think what you're sort of commenting on is you see some occupancy fluctuations across the board in all of the quality of the centers.

And again, I think that reflects more of a long-term approach of balancing short-term occupancy objectives with longer term, wanting to get the right tenants in the right spaces and have them there for a 10-year term.

So when we talk about Santa Monica, we're talking about Washington Square, these are properties that we want to make sure we use the recent tenant bankruptcies and the early terminations to get the right tenants in the right location who are going to be successful and make the center a draw.

So we've had a space at Santa Monica, which is arguably one of the best space on Third Street and it's been vacant, and we're working really hard to get the signature tenant that, that space deserves.

And so it's a balance.

We -- in the short term, we have an occupancy that's a little lower than it should be.

But in the long term, we want to get the right tenant.

At this time, I'd like to turn it back to our presenters for closing remarks.

Thank you very much for joining us.

We'll see many of you in Dallas at NAREIT in a couple of weeks, and look forward to continue our discussion.

Thank you.

That concludes today's conference.

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