Macerich's CEO Discusses Q1 2013 Results - Earnings Call Transcript

May. 2.13 | About: Macerich Co. (MAC)

Macerich Company (NYSE:MAC)

Q1 2013 Earnings Call

May 2, 2013 1:30 PM ET

Executives

Jean Wood – VP, IR

Tom O’Hern – SVP, CFO and Treasurer

Art Coppola – Chairman and CEO

Bob Perlmutter – EVP, Leasing

Analysts

Craig Schmidt – Bank of America

Richard Moore – RBC Capital Markets

Michael Mueller – JP Morgan

Paul Morgan – Morgan Stanley

Quentin Velleley – Citi

Christy McElroy – UBS

Joshua Patinkin – BMO Capital Markets

Alex Goldfarb – Sandler O’Neill

Tayo Okusanya – Jefferies

Cedrik Lachance – Green Street Advisors

Ben Yang – Evercore Partners

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Macerich Company First Quarter 2013 Earnings Conference Call. Today’s call is being recorded. At this time, all participants are in a listen-only mode.

Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue for questions. I would like to remind everyone that this conference is being recorded.

And I would now like to turn the conference over to Jean Wood, Vice President of Investor Relations. Please go ahead.

Jean Wood

Hi. Thank you everyone for joining us today on our first quarter 2013 earnings call. We look forward to see many of you Tuesday afternoon June 4th, in Chicago for our Construction Tour of fashion outlets of Chicago, as well the tour of The Shops at North Bridge on Michigan Avenue. Please contact me for the details.

During the course of this call management will be looking – will be making forward-looking statements, which are subject to uncertainties and risk associated with our business and industry. For a more detailed description of these risks, please refer to the company’s press release and SEC filings.

This call will be webcast for some time to come, we believe it is important to note that the passage of time can render information stale, and you should not rely on the continued accuracy of this material.

During this call, we will discuss certain non-GAAP financial measures as defined by the SEC’s Regulation G. The reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure is included in the press release and the supplemental 8-K filings for the quarter, which are posted in the Investors section of the company’s website at www.macerich.com.

Joining us today are Art Coppola, CEO and Chairman of the Board of Director; Tom O’Hern, Senior Executive Vice President and Chief Financial Officer, and Robert Perlmutter, Executive Vice President, Leasing.

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

Tom O’Hern

Thank you for joining us today. First, I’d like to introduce John Perry, our Senior Vice President of Investor Relations. We’re very pleased to welcome John to our management team in this newly created position to withstand investor relations efforts. We’ve known John for many years at Deutsche Bank and we know he is going to be a great addition to our team.

As most of you noticed, we added a new disclosure in the supplement today. The development pipeline on page 30 of the supplement. Mark will elaborate on this pipeline later in the call. Today, we are going to keep our introductory comments brief. We will have plenty of time for Q&A. That being said we will be limiting this call to one hour. If we run out of time and you still have questions, please do not hesitate to call me or John Perry or Jean Wood.

On the operating metrics, we continued to see strong fundamentals in our business, leasing volumes and spreads were both good. We signed leases for 325,000 square feet during the quarter with an average releasing spread on a trailing 12-month basis of about 15% – 14.9%. Occupancy rose nicely from a year ago at 93.4% that compared to 92.1% at March 31, 2012.

Adjusted FFO was up 13% in the quarter to $0.86 compared to $0.76 a year ago. Same center NOI increased by 3.4% compared to the first quarter of last year. And it’s important to note on that statistic that it does not include straight-lining or lease termination revenue.

This increase in same-store NOI growth was driven by increased occupancy, positive re-leasing spreads in 2012 that are now rolling through our 2013 numbers and the CPI increases on our leases. This is above our guidance range of 275 between a quarter, but this is just one quarter. So we’re not ready to modify that guidance yet but we’ll readdress that guidance after the second quarter.

We had gain on land sales during the quarter of $2.2 million. Those were sales that we had anticipated and they were included in our previously issued earnings guidance. There was significant savings on interest expense during the quarter as our average interest rate went down to 4.1%, compared to 4.7% in the first quarter of 2012.

Over the past 12 months, we have made significant progress on our balance sheet. Our debt to market cap at quarter end was down to 42.6%. Our floating rate debt had been reduced to 23%, compared to 36% a year ago. Our average debt maturity duration has increased to almost 5.5 years compared to 3.4 years a year ago.

We continued to take advantage of this great financing market. During the past 12 months, we have completed over 2.6 billion of financings, that’s our pro rata share. The average term of those financings has been 8.3 years and the average interest rate 3.4%. These low interest rates that we have been locking in have had a significant positive impact on our cash flow.

Our interest coverage ratio, for example, has improved to 2.9 times, compared to 2.5 times a year ago. There is only about $480 million remaining in maturities for 2013 and there we have two big loans coming up, one FlatIron Crossing with an interest rate of 5.32 and the other is Tysons Corner Mall with an interest of 5.22. Both are very underleveraged with interest rates and placed significantly above where we could finance today. Going forward, we will continue to put long-term non-recourse financing in place and continue to stretch out our maturity schedule.

In this morning’s press release – last night’s press release, we gave guidance – updated guidance on FFO. We increased our previously issued estimate by $0.03 at both bottom and top end of the range with a new range being $3.35 and $3.45. The increase in guidance is due to the strong first quarter performance including occupancy gains, rental and recovery growth and other operational efficiencies. We’ve also encountered a better interest rate environment and loan environment than when we did our initial 2013 forecast.

The guidance range includes an assumption of $500 million to $1 billion of dispositions during 2013, that has not changed from our original guidance. As part of that assumption, we also assume a mid-year execution of those dispositions on average and average cap rate is 7.5%. Art will be discussing dispositions in more detail shortly.

As I mentioned, and again we are not going to modify at this time our same center NOI growth assumption, but we’ll revisit that at the end of the second quarter. And the revised guidance quarterly split for the remainder of the year would be, of the total FFO 23% will come from the second quarter, 23% from the third quarter and 29% from the fourth quarter.

Now I’d like to turn it over to Art.

Art Coppola

Thanks, Tom. First of all, I’m going to talk about our dispositions recycling program, then I’ll talk about our development to both underway as well as our shadow pipeline as outlined in our supplemental. And then, I want to talk a little bit about our same center NOI growth and the prospects for the immediate future.

On the topic of dispositions, I’d like to first of all revisit the why behind our recycling program. The disposition of recycling program was really driven by our observation that as a result of the acquisitions of Kings Plaza and Green Acres, that we were able to do a tax advantaged reverse 10/31 exchange and take 14 assets and essentially allocate the high basis, the new basis of the two centers that we have bought into 14 older centers, which therefore would make them tax efficient for disposition.

Secondly, one of the drivers behind the decision to expose a number of properties to the market and we exposed a larger number than we thought would be purchased because we had no idea who the – what properties the buyers would be interested in. A second major driver of that decision was to reload our balance sheet after the $1.7 billion of acquisitions.

As you remember those acquisitions were funded using property level or other corporate level debt of $1.2 billion, which is a naturally high amount and we knew that it was temporary. We decided to reload the balance sheet through dispositions.

Another driver of the decision to go through the recycling was to essentially think about this as recycling capital from older, slower growth assets into Class A higher growth assets such as Tysons and Fashion Outlets of Chicago and the others outlined in our supplemental in the shadow of pipeline.

Another driver was our decision to prune our portfolio to increase our brand value. So that when retailers think about us, they are really thinking about the best centers in the U.S. and an extremely high quality pure portfolio. We wanted to prune the portfolio also because we had observed and it was intuitive as well as actual but over the last 10 years if we look at it, we look at our lower productivity centers versus our higher productivity centers.

The better centers produce better NOI growth, the bigger centers produce better NOI growth than the smaller centers. The smaller centers are very stable, but they just don’t have the same dynamic qualities that a real powerhouse has.

And finally the decision to recycle capital out of these lower sales productivity and non-core geographic locations was to heighten our focus of our management team on fewer bigger assets, we did not want to dilute our focus and our attention.

Now I’d like to report to you how the disposition and recycling program has been going. We started the process in December with early teasers through brokers and we exposed the properties through a number of buyers and we got a significant amount of interest and we’re pleased with the progress and the status of the disposition.

Having said that, while I’m willing entertain questions about the disposition program, please respect the fact that we are in highly sensitive negotiations with various buyers. Some of the deals, the buyers have money at risk, that’s not so sensitive. In some of the deals, the buyers were under contract and if essentially a free look during the due diligence period and other deals were still in either a first or second round of bidding.

So talking about the size of the disposition and recycling program and the status of it to some degree could comprise on negotiations. So if we get into sensitive territory, please respect the fact that I may say look I can’t answer that question. Interest has been strong. We’ve probably received bids from at least 10 groups on a selection of 14 assets. We also marketed three assets in the Seattle area and two retail assets and an office complex received numerous bids. The bids came from a combination of private equity folks, large private equity loan folks as well as some public companies.

At this point in time, I’m pleased to report to you that our current guidance remains $500 million of dispositions for the year to a $1 billion. We are on track and on target with that. I feel extremely comfortable with the low end of the range. We feel very solid at that end of the range.

And that’s not to mean that we’re not going to hit the high end of the range, but really to get into great detail about specific dollar amounts at this point in time would really comprise our overall program. So our guidance remains basically what we gave you three months ago, but our execution is really in very good shape.

If you think about it, the process of, first of all packaging up the tax attributes that needed to be handled to make these properties ready for sale. And then the process of marketing and going through multiple bids and now to actually be in contract on numbers of assets and actually be hard on assets. That’s really good progress on a matter of four or five months. So I am pleased with where we are there and we’re going to accomplish the purposes that we sought to accomplish.

Turning to the development pipeline, as Tom noted, there is obviously the new supplemental that we have there. Chicago, we will look forward to having a hard-hat tour with those of you that who want to join us in June at NAREE, we look forward to the grand opening in August. We’re extremely proud and pleased. Retailers are – have very high expectations and we also have very expectations. This is a one-of-a-kind opportunity.

One of my board member said so, how many more of these are we going to do and I said, well, I don’t think there’re too many other sites right next to one of the busiest airports in the world that you’re able to get this kind of tenant mix on.

So, it’s one-of-a-kind but we’re happy to have had the opportunity to get involved to this point and we think it’s going to establish our presence in the outlet industry not as being big in terms of size or quantity by any stretch but certainly being productive on those that we own which is consistent with the strategy that we outlined for you couple of years ago when we said that we are going to move into this arena.

Looking at our Tysons development, very pleased to be able to deliver on our prognosis for you that we gave you on our last call that we anticipated signing a second anchor tenant in the office complex we’re pouring I think about a floor, a week in that office building, I think we’re up to the fourth floor above grade now. So that’s coming along great. Leasing activity is very strong there.

Let’s remember that Tysons is a one-of-a-kind property. So when you look at the DC market overall and you look at the different components of office or residential on a macro level, sure they’ve got headwinds, but Tysons is a universe to itself. You look at the combination of the intersection of Tysons One and the Tysons Galleria and put the Metrorail in between the two of them.

Add to that the HOT Lanes that have now been open both to the North and the South on the beltway which has cut the good news for shoppers and employees by half, taken a 45 minute commute and reduced it to 15 or 20 minutes and this is just a one-of-a-kind location. You’ve got almost 3 million feet of Class A retail at one intersection. I’m pleased to see that the Metrorail is just in the process of awarding in excess of a multi-billion dollar contract to extend the rail from Tysons Corner to Dallas.

So now we’ll have the rail going all the away from Dallas with primary stop at Tysons Corner to Downtown. We’re seeing synergies between the five elements that we have here on our densification. The office users for example both Intelsat which by the way just went public it’s for those of you that might want to know more about who that is, obviously it’s a household term.

Both Intelsat and the Lloyd’s HR departments have already started talking to our residential f developer Kettler about getting pre-reservations for residential units for their employees. When you add the number of employees that are going to be there in our office building to the number of employees that are in the immediate trade area, then I think 170,000 office workers in the immediate trade area.

It’s a very natural thought that those employees would want to have a live, work, play, pedestrian environment young, old and professional has to travel a lot. They could live without a car. Why wouldn’t you? It’s a great new urban paradigm in what was originally obviously a suburban environment.

So, the residential, we anticipate notwithstanding the macro noise that you hear in the market that our residential building is clearly the Class A building in the market. You don’t have any other buildings in the entire market and certainly looking at Tysons that has the amenity package that we have, that has the access to mass transit that we have both by car with the HOT Lanes as well as rail that takes into the airport as well as Downtown.

That has the shopping, the dining, the entertainment and the choices that you have. So we’re very bullish and comfortable on the residential component here. The hotel operator that we have, Hyatt Regency, they’re extremely excited. They operate a hotel over at Ruston. And they look at the plaza that we’re creating, which is almost 2 acres compared to the public space that they have at this other project, which is 10% of that in size. And they are so enthused about the opportunities for special events, weddings, banquets and other events that they can host there.

They see the fact that the plaza is the key glue, that ties the office, the residential, the hotel and the retail together. We’re seeing synergies in the retail. Leasing is really beginning to take on a new view with the retailers now taking space that formally was viewed as very good space, which is essentially the new entrance area, that connects to the plaza. And they now see that as the 50 yard lines, very enthused about that.

Moving to Fashion Outlets of Niagara, we have internally green light of that project where over 50% pre-leased in terms of handshakes and commitments. I’m not going to get into details on how many leases are signed, because at this point in time, you are not at that point, but we’re green lighting it from the viewpoint of moving forward with an anticipation that we open that project in late 2014, early 2015. We are anticipating at least 10% stabilized return on our investment there.

Other projects that are in our development shadow pipeline that we are obviously very enthused about. King’s Plaza, Kings you will see in the supplemental now is doing $700 of square foot. Sales were up 9.4%, comp sales for the first quarter of this year. Green Acres, sales were up 7% for the first quarter of this year.

So Kings, we have had development teams working there almost on a weekly basis and we are very, very bullish on what we’re going to be able to accomplish within that center and the timeframes that we anticipate for that are indicated. The expenditures that we have outlined of – this is a very broad range in the shadow pipeline and that’s why it’s in the shadow pipeline and the hard pipeline is $75 million to $100 million. We anticipate very good double digit returns there.

We’re looking to make a remerchandising maybe on the food court most likely. And this does not involve recapturing any anchor space or recycling any big boxes within the center. This is really essentially doing what we do best which is simply remerchandising and refreshing and repositioning centers. As you know, Brooklyn is on fire.

You can barely go a week without picking up a magazine or newspaper article. I read in LA just last Sunday, was talking about how Brooklyn is now the hippest spot in the U.S. And this is – we’re very pleased with that.

Green Acres, we are pleased to let you know that we closed a couple of weeks ago on the acquisition of 20 acres of contiguous land right off of the Sunrise Highway. So it’s exactly contiguous to the center. So the opportunity to buy 20 acres of land for about $20 million exactly contiguous to a center that is doing over $800 million in total sales. We’re very pleased with that. And we have – we’re putting together our thoughts with demand sourcing right now. From retailers, we got lots of demand from big boxes as well as anchor tenants that want to either come in or reposition or expand.

I now want to talk briefly about same center NOI growth and our outlook. First of all, I want to say that on the same-store NOI growth that I do want to observe that in the same way that I observed that simply putting at number of sales per square foot was only two dimensional.

And it didn’t add a third dimension of adding the quality of the sales per foot and adding the NOI associated with the properties. But I think that the – the focus of same center NOI – what we get it that same center NOI is going to be a key driver for our share performance and for anybody’s share performance, especially when share prices were getting lofty. But I do have to remind you that one has to be careful in the operation of the regional shopping center, not to be shortsighted in leasing.

If you can chase same center NOI at the expense of long-term value creation. So we do keep that in mind. I will take responsibility for the fact that going back to January of 2011 as we’re coming off of 2009 and 2010, that I drew the line on rents. And, I did draw the line on rents across the portfolio.

Frankly, in retrospect, it may have been a better idea to draw the line on rents only in the highly productive centers and to be a little more relaxed on rents in the Bs and the Cs that we own, and to maybe chase occupancy a little bit more than the Bs and the Cs that we own. But, we are very clear on our strategy today. We had to take a hard line that reestablished the balance of power in negotiations between landlords and the tenants, because the tenants had a hay day in 2009 and that had to stop.

Our focus on same center NOI growth is primarily driven by four factors today. One is to drive our rents in our merchandised mix at our A malls. Two is to drive occupancy at our B malls. A third way of driving our same center growth is to recycle out of our B malls and recycle that money into the repositioning of our A malls, so that’s a big part of the strategy. Four is expense controls.

We had some very significant renegotiation of our total facilities contracts in the mid to latter part of last year that are beginning to flow through our properties this year. So I’m very pleased about that.

But on same center NOI growth, if you look at our history over 20 years, we’ve always been in the top tier of peers. I recognized the importance of this measure going forward, but I also want to let you know that value creation is more important than same-store NOI growth many times, and your brand protection is more important at times.

So there are times that you are better served to take a little bit of less rent in an A center to take a better tenant mix which enhances the brand, enhances the sales of the overall center and as you’ve heard rent is a function of sales and if you take care of the sales, the rent will take care of themselves. So we’re very bullish in terms of prospects for things in our NOI growth was focused on it.

If you take a look at the average rents that are in place in our portfolio today March of 2013 versus March of 2012 we are at 4,763 a foot versus 4,587 a foot and occupancies were up 130 or so basis points and we are very focused on this going forward and that’s part of what gave us the confidence to increase our guidance.

We could have likely increased our guidance a little bit more, but given the noise and the lumpiness and the uncertainty of the recycling disposition program we felt that we did was prudent. At this point in time, we’d like to open it up and welcome your questions.

Question-and-Answer Session

Operator

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

Craig Schmidt – Bank of America

Thank you.

Art Coppola

Good morning, Craig.

Craig Schmidt – Bank of America

Hi, I’m seeing really strong performance in rents and rent recoveries in the first quarter. And I wonder if there was any concentration of where that lift came from or maybe just some color behind that – those strong numbers.

Art Coppola

I mean it really the – it’s across the portfolio, Craig. You’ve seen nice growth in recoveries. And particularly if you look at recovery percentage, it’s up because we are able to hold our expenses in line with last year. And that combined with top line rental growth really was a big part of the growth in the first quarter.

Tom O’Hern

We cut about what amounts to 1% of same center expense out of our operating expenses, which is just beginning to flow through our numbers, and those flow equally through every single property.

Craig Schmidt – Bank of America

Okay, great. And, I was wondering if you had a sense of where the occupancy might be at Fashion Outlets in Chicago, when it opens in August 1st.

Tom O’Hern

We don’t control the tenants opening dates. That’s always – we don’t control the permitting process, the building inspector process, all of those things. Look, we are over 90% signed. Our anticipation is we’re going to open with 90% of the lights on but we don’t control that. We work with them well and we have expeditors all over the place helping them. The tenants are very bullish on what they are doing. And they are doing everything they can to make sure they are open, but we don’t control that process.

Craig Schmidt – Bank of America

Okay. And then just finally the 20 acres next to Green Acres, obviously it will be a lot of big box interest. But, is there something better that you can do with that?

Art Coppola

What we’re evaluating right now is we look the strength of Green Acres is in catering to the masses. And if the center that does as we mentioned when we bought it over $800 million in total sales. So that’s a powerhouse. We’re going to add retailers that bring shoppers.

We’ve already got a very large selection of specialty stores in the mall. So there is now reason to try and to expand that offering. But we’re evaluating it right now. It was no-brainer to buy it. It had been sitting there forever and when we saw that we had an opportunity to buy go and there is a old theater there. When we saw the opportunity to buy it, you couldn’t have bought a more beautifully positioned piece of land. There is not even a street in between it.

The driveway that’s in between it is owned by us. I mean I have never seen where you can buy a property that’s doing $800 million in business and you can buy 20 acres of contiguous land right next door with that kind value. It’s – it was a no-brainer. There was lose tons of tenant demand and we’ll see what we do. There could be an expansion of the mall and part of that land is used for surplus parking, which is much cheaper than we would have had to have faced using deck parking, we’ll see.

Craig Schmidt – Bank of America

Yes, that was a pleasant surprise. And let’s assume that’s great. Thanks.

Art Coppola

We’re starting to work on buying, the land before, we even sign the contract to buy the mall. Thank you.

Operator

(Operator Instructions). And we’ll take our next question from Rich Moore of RBC Capital Markets.

Richard Moore – RBC Capital Markets

Hello, good morning guys.

Art Coppola

Good morning, Rich.

Richard Moore – RBC Capital Markets

One of the things, we had heard a bit recently is that getting CMBS debt for B-quality malls was getting more difficult than it had been. Do you guys have any thought obviously some of your buyers for the 14 assets might need CMBS debt. And I’m curious do you have any thoughts on the CMBS market and specifically with regard to regional malls and maybe the B assets in particular?

Art Coppola

Sure. We’re not been answering any B assets on our own. So we’re not a good proxy for that. I would point out to you that we’ve placed $820 million – or $925 million of debt on two malls that had JC Penney as an anchor. And that was Queens and Green Acres all in the last three months, but obviously those are not B-malls.

The buyers that are working on deals with us, generally are putting between 60% to 70% debt on the properties and it’s I think CMBS in every case, the rates that I’m seeing that they’re seeing are pretty attractive. They are within 50 basis points of what we’ve been borrowing even as they stretch their leverage up to 65% to 70%. Some of these malls have JC Penney and Sears as two of the three anchors. All of them have one or the other and some of them have both as part of four.

I’ve not seen any impact whatsoever in terms of the lending world and I’ve heard the noise about that on other calls. I have not seen the impact now. It does matter, where your JC Penney is located.

So if it’s a JC Penney, that’s in a mall that’s doing $220 a foot, you’re not going to be able to get a CMBS loan. Just like if it was a Nordstrom anchored center that was doing $220 a foot, you’re not going to be able to get a CMBS loan. So I mean really the productivity of the center I think is the more relevant fact. Certainly, the lenders are willing to learn.

Tom O’Hern

Rich, I’d characterize it as still being very aggressive in the CMBS not two weeks ago with San Tan Village and it was very, very, very competitive. And as I said, we are not financing any B’s right now, but we have been hearing from the brokers as it relates to some of the assets in our disposition program and they still characterize the borrowing environment as very borrower-friendly and that the underwriters in CMBS are being very, very aggressive. That’s a...

Art Coppola

The quality of the asset is key, all right. So remember that. The other point I would make out is that – we would make is that, look, one of the guys that’s really active in the CMBS market, is the same investment bank that just loaned $1.75 billion to JC Penney.

Richard Moore – RBC Capital Markets

Yes, fair enough, all right. Good, guys. Thank you.

Art Coppola

Thanks, Rich.

Operator

And we’ll take our next question from Michael Mueller with JP Morgan.

Michael Mueller – JP Morgan

Hi. Couple quick ones here. When we’re looking at the disposition range of $500 million to $1 billion, is there a certain number within the range that’s ideal the way to look at it, I mean as – is a 1 billion better than 750 million?

Art Coppola

No, not really. I mean it’s – look it’s opportunistic, 500 million could be a great result, a 1 billion could be a great result, it’s very opportunistic. We’re not chasing a number, we’re just exposing these properties to the market, we’re very far along in the process. But very far along could mean that we’ve got somebody that’s in due diligence and there go hard date could be tomorrow. So it’s really hard to talk about the process right now.

Other than, we’ve had substantial interest, and we’re extremely confident about the lower end of the range. We don’t control whether buyers actually perform, we don’t control, whether they step up and go hard, when their go hard date is. So we can’t prognosticate what the ultimate number would be.

Michael Mueller – JP Morgan

Got it. And okay. And then, if we look at the year-over-year occupancy gain that you posted this quarter, would that appear a same-store increase or how much of an impact was there from acquisitions and dispositions in there?

Art Coppola

Mike that was mostly same – same center. I mean you’ve got all of the detail in the supplement, where you not only see sales by assets, but also occupancy. So you can see a relative occupancy levels in some cases, actually the acquisitions have a lower occupancy level in our – reported numbers, so most of that was same center gain in the quarter.

Michael Mueller – JP Morgan

Got it. Okay. Thank you.

Art Coppola

Thanks, Mike.

Operator

And next, we’ll go to Paul Morgan with Morgan Stanley.

Paul Morgan – Morgan Stanley

Hi, good morning.

Art Coppola

Good morning, Paul.

Paul Morgan – Morgan Stanley

On the development schedule, just maybe you could provide a little bit color, I mean, are you – I think you said last quarter that you really have kind of plans for the majority of the top couple of tiers at least of your portfolio and the way you group them and you chose to put the one that you did in the development, how should we think kind of – what does that mean for those versus the others, when would you kind of what do you characterize being kind of real enough to provide that disclosure and kind of how would that evolve going forward?

Tom O’Hern

I would expect that you’ll see the shadow pipeline grow each quarter through the foreseeable future, and I would expect that you’ll see properties doing that are in the shadow pipeline move up to the in-process grouping periodically. I’d expect that if it shows up on the shadow pipeline, let’s say the probability of that it’s going to become a reality is extremely high.

We took the attitude that let’s kind of start with a skeletal approach on this first quarterly provision of the supplement and will be adding to it. One of the debates was that we do have many properties where we have a $10 million or $20 million repositioning that we’re pursuing or $8 million opportunity that’s still creating value and we didn’t want to – we’re still kind of debating and John Perry is helping us to think about how we provide kind of clean disclosure without it being a syllabus of activity. So you’ll see additions to the shadow pipeline and my guess is every quarter for the foreseeable future.

Paul Morgan – Morgan Stanley

All right, you’re two-for-two on a disclosure side this course. I look forward to what comes out next quarter as well. On the

Tom O’Hern

We just need the guidance from you on that and then we can try and I’ve given you some. I will give you more if you like. On the occupancy, I appreciate the detail there and when you actually look at it, a lot of that kind of pickup and occupancy.

Your mid tier centers are kind of 20 miles that are up 200 basis points. Kind of in the context of what you said earlier, I mean is that a reflection of a change in strategy. Some of it maybe kind of driven by these some of these are being marketed or is it just – are you seeing a pickup in mid-tier demand that is kind of noteworthy.

Art Coppola

Bobby, you want to address that.

Bob Perlmutter

Sure. Paul, its Robert Perlmutter. I would say in general it reflects an improving environment for some of the mid tier centers and I think that improves a couple of ways. One is the just starting with the supply. The shrinkage is much lower than it was a couple of years ago where bankruptcies were not really so much higher.

So I think there is some stabilization in performance and I think the other thing we see is the activity with the national retailers, a number of national retailers are rolling out formats more targeted towards the mid tier centers people like us. So many of the retailers have open to bias in this category that a couple of years ago they didn’t have. So, I would say, it’s general improvement in the environment and the retailer demand for the mid-tier centers.

Paul Morgan – Morgan Stanley

Okay, great. And then just lastly on the delay deal where the rents versus your kind of pro forma going in now that you do?

Bob Perlmutter

It hit our pro forma. It’s – we’re in very good shape both the two anchor deals we’ve got are right at pro forma. So, our anticipation is that the balance of the lease up – we should easily hit our pro forma or above. We feel very good about – we feel really good about where we are on the entire project and in all five elements of it.

And I do want to emphasize all five elements of Tysons, and the appliance is one of those five elements, because that’s the staging area, and the connectivity that is going to make this such a unique property and it’s going to feed each of the properties, the retail property. It’s the synergies of having one owner develop this are massive, had we sold off the air rights to anyone of the towers, the opportunity to cross markets, cross brand and plan the traffic between the different elements, would have been loss, which would have been a shame.

So Alaska and Macerich, the Alaska Permanent Fund, which is a very thoughtful investor and we planned out from the very beginning and thought about selling off development rights to others then came to the conclusion that we should – we need to build this on our own to protect the golden goose, which is the retail, but to make sure that it all works together, and the thesis that you know, that there was synergy and then opportunity to cross market, and across brand. We’re already seeing the reality.

Paul Morgan – Morgan Stanley

Great. Thanks.

Art Coppola

Thank you.

Operator

And we’ll take our next question from Quentin Velleley with Citi.

Art Coppola

Hi, Quentin.

Quentin Velleley – Citi

Hi, good morning, out there. Just in terms of the – the new development disclosure, which is great to have, just wanted to try and basically reconcile some numbers, if you look at the schedule, you’ve got a total of about $179 million, which is your CIP or your pro rata capitalized costs, but then, if you look across that the balance sheet, there is a total, it’s more or like $430 million.

So there is a roughly $250 million gap between the two. You just mentioned a couple questions ago that some of it is the smaller type projects, but can you maybe just run through how much is the smaller projects and what else is in that spread?

Tom O’Hern

Yeah, another quick reconciliation, it’s not going to take much time here because we don’t have that much. On page seven of the supplements, you’ve got your consolidating balance sheet. And you’ve got $317 million listed as CIP for wholly owns. And, Chicago is 67 of that on page 30. We have Estrella Falls 31 in Niagara10. In addition to that, we have numerous things that we got to capture in CIP for GAAP purposes.

There are non-cash items. Some cases, it’s imputed land value, which is what we have in Chicago. In some cases you have to capitalize interest even though you don’t have a construction loan. That’s a non-cash GAAP entry. And, there is about a $100 million or so of this non-cash allocations in that CIP number. And then, there is about $100 million or so are small projects – probably 20 or so projects in total of makeup that number.

If you look at the joint venture number there, it’s 112 million in CIP, our pro rata share that’s disclosed in bullet number 3 there on page 7, and that’s made up of $67 million from Tysons Corner, which ties to page 30, $4 million from Broadway Plaza, which ties to page 30 also. And then, other JVs and the accounting adjustments are about $40 million or so. That gets you to $112 million.

Quentin Velleley – Citi

Okay, that’s helpful. And then just secondly, can you just talk a little bit about your schedule at RECon in Vegas in a few weeks time. How it compares to last year and is there any sort of new concepts we should be thinking about?

Art Coppola

Well, I can speak from our experience. Our schedule is very strong, stronger than last year. We actually extended our hours on Sunday for a full day, which previously was a half a day. So I think the – the lease environment continues to improve. We talk a lot about new concepts, and new concepts coming, two of the centers, gets a lot of press. But if you look at our 10 largest tenants, they really are equally or more important to us. And generally, our 10 largest tenants are doing very, very well that really bodes well for the coming years.

Operator

And we will take our next question from Christy McElroy with UBS.

Christy McElroy – UBS

Hi, good morning.

Tom O’Hern

Good morning, Christy.

Christy McElroy – UBS

Tom, maybe I’m being a little too technical or reading too much into this. But the updated quarterly percentages that you gave for guidance would imply 25% for Q1, which at $0.86 would put you at the upper end of your new range. Is that what we should take away from that. Or should we be thinking about the Q1 number sort of excluding any one-time items like the un-depreciated asset sale?

Tom O’Hern

The first quarter was $0.86 and a 25%.

Art Coppola

Yeah. It gets you in the range, but there is always rounding in these things, Christy. I mean that could – to be accurate and had to taken out three or four digits and that’s really implied. I could have said 23 to 24 for Q2 and Q3 and 24 to 25 for Q1. So I wouldn’t read too much into that.

Jean Wood

And I especially

Tom O’Hern

Okay Jean.

Art Coppola

Proceed with the dispositions, not controlling the timing of that. I crunch when I hear Tom give quarterly guidance with all of that activity going on, because if the disposition closes one month, I mean versus another it can change things. So I’d look at for this year, in particular I’d be looking at the year, but obviously Tom has given you his best customer on the guidance on the quarters.

Christy McElroy – UBS

Okay.

Tom O’Hern

And obviously, we will revisit at the end of the second quarter, when we will have even more information on the disposition program we can true it up then if need be.

Christy McElroy – UBS

And then with regard to other income, the last two quarters, it’s kind of spike tear. Wondering if there is anything one time in their and what we should be looking at for sort of our run rate going forward?

Tom O’Hern

No, it’s part of it is function of we have more wholly owned assets now, because we bought up our interest and flat from 25% to 100% obviously we did the same with arrowhead, we had at Green Acres and King’s. So if you go to the consolidated income statement and the supplement you see that if you take other income all the way across to that $19 million for the quarter. And that is a good run rate, we’re going to run on average $19 million to $20 million per quarter in there. There is a lot of things that go in their advertising Telecom operating machine, gift cards, sponsorship income and it’s an area this is, but I think that’s probably a pretty good run rate.

Christy McElroy – UBS

Got it, so previously you had that?

Tom O’Hern

That’s right.

Christy McElroy – UBS

And just lastly that on the last quarter you mentioned a $2 million acquisition costs on Green Acre was that an operating expenses?

Art Coppola

Yeah was in I think we came at a little bit less than that we came in above 15, 16.

Christy McElroy – UBS

Okay. Thank you.

Art Coppola

Thanks, Christy.

Operator

And we’ll take our next question from Josh Patinkin with BMO Capital Markets.

Joshua Patinkin – BMO Capital Markets

Hi, good morning out there. Niagara Fashion Outlet, I’m wondering how much of the customer base there as Canadian driving in from Toronto, obviously premium outlet opens in August in Toronto. And can the greater super regional market support another 600,000 700,000 feet of outlet space?

Tom O’Hern

80% of our customers come from Canada and they come to fashion outlets of Niagara because of the embedded differential in prices. There is a between 12% and 15% difference in the price structure for multiple reasons. And, we are – our retailers that are leasing space in our 172,000 foot expansion are very confident that that market and that price advantage will remain and they are very bullish in their interest level, and the rents that they will pay us for the expansion. So look at the – obviously, it’s going to have an impact on the marketplace, but my guess is that it’s going to have more impact on Toronto retail than fashion outlets of Niagara.

Joshua Patinkin – BMO Capital Markets

And, I assume a lot of the merchants you are talking to open up two stores these centers, is that fair to say, or I guess you wouldn’t know if they are going to be in premium outlet?

Tom O’Hern

I can’t comment on their tenant roster because I haven’t really paid attention to it because I don’t really that it’s relevant to what we’re doing.

Joshua Patinkin – BMO Capital Markets

Okay.

Art Coppola

What they are doing is fine and great for them, and I’m sure it will be a great tenant roster, but I really don’t see the centers being competitive at all with each other.

Joshua Patinkin – BMO Capital Markets

Okay, okay. On Kings Plaza, as you guys acquired, it looked like to me that Gap closed their brands at the Center; do you have any insight into their decision?

Bob Perlmutter

Josh, this is Bob Perlmutter. I think Gap’s decision to close their Gap store was based on underperformance within the center and our ability to take a larger space and bring in more productive tenants at higher rents. They continue to operate the Old Navy, which is pretty productive and has a term left. So I think that was really a specific tenant that didn’t resonate with the customer.

Joshua Patinkin – BMO Capital Markets

Okay. And I’m curious if Green Acres and Kings came as a package deal, or could you have bought these two separately, and would you wanted to that?

Art Coppola

Well, we spend a lot of time on the last earnings call, talking about that question. So I could tell you that we were offered both properties at the same time, and we were actually offered more than both properties at the same time. There were other properties, we were offered, but we always wanted to buy these two properties, we bought these two properties and we’re thrilled that we bought these two properties.

Joshua Patinkin – BMO Capital Markets

Okay. Thanks very much.

Art Coppola

Thank you.

Operator

And we’ll take our next question from Alex Goldfarb with Sandler O’Neill.

Alex Goldfarb – Sandler O’Neill

Good morning out there.

Art Coppola

Hi, Alexander.

Alex Goldfarb – Sandler O’Neill

Hey. And yeah, it is amazing you have 20 acres just for sale next to Green Acres and it wasn’t thought. Two questions, my two questions. The first question is, Art, after the last quarter, you did your listening tour. And apart from releasing the day before, you know at probably at 4 PM, which is great, what was the feedback that most surprised you?

Art Coppola

I don’t remember. I’m not being cute with you here honestly.

Alex Goldfarb – Sandler O’Neill

Okay.

Art Coppola

I think I have to answer that. The conclusion that I came to was that we can do a better job telling our story, and that’s on all levels. Disclosure is just one of them. We have a great story. And I came to the conclusion that you know, that we could do a better job telling our story and telling in – and a better job telling a story part of its disclosure.

The part of it is also telling the story to more than the normal universe of investors than we have told in the past. So going forward, we’re going to be seeking to inroads into investment groups that currently are not in our shareholder base and may not even be in the REIT shareholder base.

I guess the – look, whether it’s surprising or otherwise. The biggest takeaway I have with that – doing a great job, running your business is not enough. That you have to also do a great job telling the story that you’re doing a great job running your business. I know we do a great job running our business and I guess I may have slipped into a belief that that was enough that everybody would notice, but I did come with a conclusion that we could do a better job telling this story disclosure just part of that.

Alex Goldfarb – Sandler O’Neill

Okay. And then, Tom, on the 6.2% growth in sales. I’m assuming that’s on a total portfolio. Do you’ve the number for what it would be on a comp pool, so we can see the impact of the acquisitions versus what the same store pool prove in that – in sales?

Tom O’Hern

Alexander, your assumption is right that its total portfolio compared to the portfolio a year ago. And, although I don’t have that you’ve got the detail there, so you could have a pretty good idea of what the new assets, Green Acres and Kings may have done to that number, but they are close. It’s not going to move too much on a same set of basis, but I don’t have that.

Art Coppola

Yeah. Green Acres was right at the average and Kings was a little bit above the average, but when you look at the overall pool, if you’re 200 basis points above the average, it doesn’t move to that much.

Tom O’Hern

Right. And we had a disposition last year that was above our average, just going the other way.

Art Coppola

Right.

Alex Goldfarb – Sandler O’Neill

Okay. Thank you.

Tom O’Hern

Thanks.

Operator

And, we will take our next question from Tayo Okusanya with Jefferies.

Tayo Okusanya – Jefferies

Good morning.

Tom O’Hern

Good morning, Tayo.

Tayo Okusanya – Jefferies

How are you guys? First of all congrats on a great quarter. Just a quick question on the tenant base. We’re talking very positively about what’s going on with the tenant base, but just kind of curious, are there any retail categories where there are issues that you’re worried about or any kind of tenants on watch list that you are worried about?

Art Coppola

We definitely have tenants that are watched closely and – in all categories both the specialty stores as well as the big boxes. And, some of those tenants that were on that list a couple of years ago, many of them were junior tenants that have actually rebounded fairly strongly.

In past quarters, people like Best Buy and others have been getting a lot of press. So many of them have rebounded, I would say that, in general, we’re finding the watch list to be stable or declining.

We see the overall health of the retailers being better. In particular, we see the big boxes moving more into the mall environment and particularly in some of the B centers. That’s been a big improvement people like Ulta and TJ Maxx and others are now looking at the mall as an expansion of their store base. So, in general, it’s overall improving the environment. It doesn’t mean that there aren’t isolated incidents. Most of them are isolated companies as opposed to categories.

Tayo Okusanya – Jefferies

That’s very helpful. Thank you very much.

Art Coppola

Thank you. I think we have time for a couple of more questions. Operator?

Operator

We will take our next question from Cedrik Lachance with Green Street Advisors.

Cedrik Lachance – Green Street Advisors

Great, thank you. And thanks again for the new disclosures on the occupancy cost ratios. Looking at those numbers, your group two of sellers to – so the top 11 to 20 has an occupancy cost ratio that’s meaningfully lower than group one, and somewhat lowered and in some of the subsequent groups. And is there anything you can do in particular in some of those centers to push rent, so is that related to the mix including the fashion outlets being part of the group that’s depressing the occupancy cost ratio?

Bob Perlmutter

I mean, I would tell you there is a couple of items that are probably more mix related than drawing any general conclusions, you mentioned the outlet center, Broadway Plaza is obviously a center that is going to potentially be substantially redeveloped. So right now, it’s got a lower cost of occupancies as we keep tenants short-term.

The other factor is you have a number of open air centers there, which generally have lower than expected operating expense cost than some of the enclosed centers. So I would say that it’s more just a nuance of the mix and the timing that some of those centers are in their life cycle as opposed to any conclusions.

Tom O’Hern

There is the one point that I would make is that – hopefully I’m reading my – our own charts correctly. If I’m ready them correctly that our top 10 centers do $831 a foot, and that the next group does $623 a foot. There is a totally different dynamic at a center that does a $1,000 a foot than a center that does $650 a foot.

You have tenants at places like, Queen Center, Tysons Corner and even Kings Plaza now where their occupancy costs might be 30% of sales at times and you go to try and replace them and they can’t leave, because they have to be in the center to protect their own brand.

Likewise, when you’re offering space that happens to be available in the center like that. It’s not all lot of the question to set the rent at levels where the tenant believes they are paying 15% to 20% of their sales, because at those sales levels they can make money at that kind of occupancy costs. So, I would totally expect the most productive centers to have the highest rent as a percentage of sales.

Queen’s, we’ve been running Queen’s for 18 years at roughly 20% cost of occupancy as a percentage of sales. Now what happens is the good news is we’ve increased the square footage from 130,000 feet to 430,000 feet and we will increase the sales from $600 a foot to $1,000 a foot, and therefore the income has gone up more than 600%. So, it is also an actual dynamic of high productivity centers.

And as Bob said in the next grouping, open air centers generally are going to have lower cost of occupancies and we also have centers in that second group that are awaiting to come into the – to be redeveloped. So, many times just renewing leases on the short-term basis and the rents are staying basically at the same levels that they’ve been.

So, Broadway Plaza, even those it’s a high productive center we’re not driving rents there, because we’re keeping the leases short, because the long-term plan is to demolish the majority of the center.

Cedrik Lachance – Green Street Advisors

Okay. So if you could renew all your leases in today’s market rates, what do you think would be occupancy cost ratio in the first grouping of centers versus some of the lower groupings?

Art Coppola

You mean theoretically if you said....

Cedrik Lachance – Green Street Advisors

Theoretically...

Tom O’Hern

Well, as Art mentioned, one of the dynamics were seen at the most productive centers, the Queens Center and the Tysons Corner, so the world is. Historically we’ve always looked at an opportunity to take a larger space at lower rent and make it smaller spaces at higher rent.

We’re actually seeing the opposite happen at some of these centers where tenants are paying premiums for multilevel flagship stores and tenants step-up to an occupancy cost that is partly based on their P&L and party based on the importance of the store within their store program and at these iconic center. So we’re reaching 20% and higher at the top part of the portfolio and anywhere from the mid to high teens at the balance of the top tier.

Art Coppola

Look if I had to take a stab at that answer. I would tell you that our top 10 centers, if you started with a pallet that had the land at they’re located on, the department stores that are in-place and the small shops sitting there waiting for us to come in and lease them with complete flexibility you’d have occupancy cost of 20% at least on those top 10 centers which is actually the situation that we’re creating at Broadway Plaza. We’re running a little bit short on time and we do – I think we have one more question, Cedrik do you have anything else that you’d like to cover right now?

Cedrik Lachance – Green Street Advisors

No, thanks very much for the answers.

Art Coppola

Thanks, Cedrik.

Operator

And we have time for one more question and that will be from Ben Yang of Evercore Partners.

Ben Yang – Evercore Partners

Hi, good morning, thanks. Art, you’d mentioned feeling extremely comfortable that you will sell at least $0.5 billion on the disposition program, which is probably only 3 or 4 of the 17 malls that you’re actively marketing. And – I know you kind of threw everything else there, but are buyers actually taking a look all 17 malls or is it in the concentrated at the higher end of that – of the malls that you’re trying to sell?

Art Coppola

At the end of the day, we will probably sell six or seven properties out of the 17 that were offered. And, that’s about the best I can give you in the way of an answer right now. That doesn’t mean there are not people asking about others, but to get more specific could jeopardize some conversations.

There could be some people looking at all of them. I really – I don’t want to get into any more detail on the numbers. Remember, I’ve said there could be some sensitive questions that gets into the sensitive area, but – I think the relevant issue for our balance sheet is how many dollars are we are going to recycle. And, I feel very comfortable at the low range – end of the range that we are going to recycle and range $500 million of new cash to redeploy.

Ben Yang – Evercore Partners

Okay, fair enough. So you think 6 to 7 malls this year – maybe some interest in some of the other malls that’s higher, end up selling? Do you think you’re kind of continue this program into next year to see to try to sell more assets basically at that point or is this going to be a once you kind of sell those 6 or 7 initially?

Art Coppola

We advertised that as a limited time offer and that’s what it is at this point in time. It’s a one-time limited time offer and then we will see where we go from here. I’ve gotten frankly as a result of sitting in management committee meetings with buyers and having a renewed focus on some of these assets.

Frankly I’ve – I see upside in them. That is there. So – look, it’s a one-time limited time offer and I would not at all be surprised that this is it for now. And, but it also – I wouldn’t be surprised if we continue to prune. We will see where we go. I want to thank you all for joining us and sorry for running over a little bit, but we did want to take Ben’s question.

And we look forward to talking to you soon. We look forward to seeing those of you that are going to join us on the hard-hat tour in Chicago in a month or so and seeing in person there at Navy. So thank you very much.

Operator

This does conclude today’s presentation. We thank you for your participation.

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