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Executives

Art Coppola - Chief Executive Officer & Chairman

Ed Coppola - President

Tom O’Hern - Senior Executive Vice President & Chief Financial Officer

Robert Perlmutter - Executive Vice President, Leasing

Jean Wood - Vice President of Investor Relations

Analysts

Craig Schmidt - Bank of America

Christy McElroy - UBS

Quentin Velleley - Citi

Michael Bilerman - Citi

Cedrik Lachance - Green Street Advisors

Vincent Chao - Deutsche Bank

Samit Parikh - ISI

Todd Thomas- KeyBanc Capital Markets

Ben Yang - Evercore

Alexander Goldfarb - Sandler O’Neill

Michael Mueller - JP Morgan

The Macerich Company (MAC) Q2 2013 Earnings Conference Call August 6, 2013 12:00 PM ET

Operator

Good day ladies and gentlemen. Thank you for standing by. Welcome to The Macerich Company, second 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 up for questions.

I would like to remind everyone that this conference is being recorded and I would now like to turn the call over to Jean Wood, Vice President of Investor Relations. Please go ahead.

Jean Wood

Thank you and thank you everyone for joining us today on our second quarter, 2013 earnings call.

During the course of this call management 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.

As 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 Investor Section of the company’s website at www.macerich.com.

Joining us today are Art Coppola, CEO and Chairman; Ed Coppola, President; 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 Jean. Today we’re going to keep our introductory comments brief to allow 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 Art, John Perry or Jean Wood.

It was another great quarter. We executed on our plan to dispose of non-core assets. We continue to strengthen our balance sheet and we had a very strong operating performance during the quarter. That combined with the blockbuster grand opening of Fashion Outlets of Chicago last week, it has been a very productive 90 days since our last earnings call.

Looking at the operating metrics, we had good leasing volume and spreads. We signed 262,000 square feet of leases during the quarter, with a positive re-leasing spread of just over 14%. We had very strong occupancy at 93.8%. That was up 110 basis points compared to June 30 of last year.

FFO for the quarter, adjusted FFO was up 18% to $0.87 per share. That compared to $0.74 a share a year ago. Some of the things that impacted that growth were same center NOI, which increased 4.6% compared to the second quarter of last year. That statistic does not include straight lining or rent, lease termination revenue or SFAS 141 revenue.

This strong increase was driven by increased occupancy, positive re-leasing spreads in 2012 that are now rolling through 2013 revenues, and CPI increases on leases. This is the strongest increase we’ve seen since before the recession. It’s obviously well above our previous guidance range of 2.75% to 3.25% and as indicated in our earnings release, this morning we are raising our guidance and an important part of that is an upward revision of same center NOI guidance to 3.75% to 4.25% for the year.

We had gain on land sales during the quarter of $2.2 million. Those were included in our previously issued guidance. There’s also significant interest savings during the quarter as our average interest rate went down to 4.3% compared to 4.7%, the second quarter of 2012.

There’s another strong quarter in terms of balance sheet improvement. Our debt to market cap dropped to 41%. Our floating rate debt has been significantly reduced. Today it stands at 18% of total debt, compared to 31% of total debt at June 30, 2012. Our average debt maturity has increased to 5.6 years. That compared to 3.9 years at June 30th of ‘12.

Concurrent with our inclusion in the S&P 500 Index this past quarter, we sold 2.5 million shares of common equity, at an average share price of $70.42 per share. This stock was sold under our ATM program. The net proceeds were $171 million that were used to pay down debt.

Yesterday we committed to an $850 million life company refinancing of a debt on Tysons Corner super regional mall. This is a 10 year fixed rate loan, 4.1% interest rate. It will mature in January of 2024 and that pays off a loan that was approximately $300 million and had a GAAP interest rate of 4.78 and an actual coupon up in the mid-5s. The company owns 50% of Tysons and we’ll see roughly $275 million of excess loan proceeds and those proceeds we’ll use to further reduce debt, primarily floating rate debt.

Also effective today, we closed on an extension in rate reduction on our $1.5 billion unsecured line of credit. The new credit facility has an August 2018 maturity date, so we stretched that maturity out two years from the prior facility, all in a five-year term and the interest rate also was reduced. Our current leverage level it was reduced to 1.5% over LIBOR and its down from the old facility, which was 2% of the LIBOR. We can expand this $1.5 billion facility to $2 billion at our election.

Looking now at FFO guidance, we gave new guidance in the press release and the range was increased $0.03 to $3.38 to $3.48. Included in that guidance change was the assumption of $530 million of assets that we’ve actually sold year-to-date. Art will be discussing the asset sales in more detail in a few moments.

As I mentioned, the same center NOI growth assumption has increased 100 basis points to a range of 3.75% to 4.25%. We are also cutting our estimated lease termination revenue. Initially we had $7 million in our guidance, we are cutting that down to $3 million based on what we’ve seen to date and what we expect for the remainder of the year. So there’s a $4 million reduction there.

This guidance factors in the May ATM equity issuance, which was not in our previous guidance. Obviously there’s a dilutive effect there. If you look at the dilutive impact of the asset sales and the ATM on 2013, it’s about $0.11 a share. That’s very close to the range we have when we gave original guidance on the dispositions of potential dilution of $0.07 to $0.14. So that $0.11 of dilution has been factored into the new guidance range.

At this point I’m going to turn it over to Art.

Art Coppola

Thank you Tom. Second quarter was a quarter of many terrific events and openings for us. Probably the most significant event that occurred for us in the second quarter is one that really hasn’t captured that much attention, but is really a seminal moment in the history of Macerich and that was our inclusion in the midpoint of the second quarter into the S&P 500.

This is of particular note, because Macerich was the first REIT to be added to the S&P 500 since the dark days of March of 2009. We are particularly gratified and pleased to be included into the S&P 500. The days of March of 2009 led us to the conclusion that we wanted to pursue a strategy of owning fortress assets and we wanted to create a fortress balance sheet.

Over the years, the last four years, you’ve noted the great strides that we have made on our balance sheet, and on the fortress asset side of things, we’ve improved our existing assets and we’ve pruned out some of the assets that are not fortress assets or completely core. So we are extremely pleased with the progress that we made over the past four years, which really culminated in my mind with our inclusion in the S&P 500 in the mid-point of May of this year.

I’m going to give a little bit of color on the dispositions that we have completed for the year. You’ll remember in February, when we initially gave guidance this year, that we indicated that we were putting a number of assets on the market. That we were agnostic as to timing and price and that we didn’t expect to sell all of the assets that were being exposed to the market.

In our May conference call we guided to the number of assets that we felt that we would sell and we said what we think we are going to sell, six or seven assets, and were guiding you towards the low point of the $500 million to $1 billion of total disposition proceeds. In fact, we have sold six assets, five retail assets and one office asset.

The assets that were sold and the dates are that the Redmond Town Center office project was sold May 29 to a private equity buyer, for a gross price of about $185 million. That was in a joint venture with Cadillac Fairview; May 31 we sold Green Tree Mall for just over $80 million to a private equity buyer; June 4 we sold Billings, Rimrock Mall and Northridge Mall in Salinas for just approximately $230 million to a private equity buyer. June 12, those were wholly owned assets, Rimrock, Northridge and Green Tree.

June 12, we sold Kitsap Mall, which was in a joint venture. It was in the greater Silverdale marketplace for just under $130 million, and then just this week we closed on the Redmond Town Center retail disposition for approximately $130 million, August 1, also in a joint venture.

Our pro rata share of the disposition proceeds was approximately $530 million. There was debt that encumbered these assets; our pro rata share of about $60 million with a net new cash that we raised from the real estate disposition was approximately $470 million.

You’ll remember in our initial guidance, we said we’d sell between $500 million and $1 billion and our assumption was that there would be the assets that would be sold, would have about 33% property debt on them, so the opportunity was there to raise approximately $650 million of new equity.

Shortly after our earnings call on May 2 of this year, three days later in fact, we were notified that we were being included in the S&P 500. We sat back and we looked at the possibility of using our ATM as part of the inclusion trade and came to the conclusion that our best strategy to completely retool our balance sheet for the year with complete certainty was to close the deals that we had under a real estate contract, and to raise $170 million of common equity through the use of the ATM as part of the inclusion trade.

That got us to net new cash that was raised for the year of about $640 million, which if you look at it would have achieved the high end of the objective that we announced in February in terms of the amount of cash that we wanted to raise.

As to dispositions going forward for the balance of the year, we are continuing to have some conversations with some folks on some assets, but we are in a position to state that we’ve achieved our objectives for the year and that we’ll be very selective in terms of further dispositions.

We are going to continue our policy of pursuing a fortress asset and a fortress balance sheet portfolio and as part of that; dispositions are a key component of our strategy. So those conversations will continue over the next couple of years.

There’s nothing in particular of any meaning that’s under contract at this point in time, but not to say that there won’t be further disposition later in the year, but given that there’s nothing under contract at this point in time, other than a very small asset. It would be imprudent to go ahead and project any further dispositions into our guidance numbers for the balance of the year.

Turning now to development. Obviously the big story post end of the quarter for us was the grand opening in the Fashion Outlets of Chicago. Many of you toured the asset with us in early June and we can tell you that the grand opening was beyond the expectations of all of our retailers and certainly in line with our very high expectations.

We had great customer traffic counts, so we estimate that we had in excess of 60,000 people per day in the property from Thursday, August 1, and that held steady all the way through Sunday, August 4. So we had an extremely strong four-day grand opening, from Thursday to Sunday.

It’s unusual to see grand opening sales on a Sunday exceed the actual grand opening of three days prior, but many of our retailers in fact told us that their Saturday and Sunday sales were even higher than their grand opening sales.

Retailers pretty much across the board told us they were several hundred data percentage points, 200%, 300%, 400% above business plan. The vast majority of our retailers told us that the grand opening at Fashion Outlets of Chicago was either the best ever grand opening or in the top two or three that they had ever opened. So we’re extremely pleased with the reception. It’s in line with our expectations.

The challenge for the retailers at this point in time is that sales were so strong, now it’s a simple logistics of replenishment and even increasing their own expectations. So we are thrilled with the grand opening of FOC and we look forward to reporting the results on that as we get facts and figures on sales during the balance of this year.

Turning briefly to the balance of the development pipeline, Tysons densification proceeds on time and on budget. Leasing of the office building is extremely active. We’ve got a number of users that we are talking to right now. So our goal, our internal goal of being 80% to 85% leased by the end of this year, we see that as being completely attainable.

Also of interesting note, if you think about it, is to take a look at the funding of the Tysons development. With the refinance that was announced yesterday, we are pulling approximately $275 million of excess refinancing proceeds out of the retail project. So that repatriates all of the capital that we spent to-date on the densification of Tysons Corner and pre-funds all of the future expenditures that will be spent over the next 16 to 18 months.

Our balance sheet is in terrific shape and at this point in time we are thrilled with our progress, with the leasing results, the operating results, the improvement in same center NOI and would like to open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll take our first question from Craig Schmidt with Bank of America.

Art Coppola

Hey Craig.

Craig Schmidt - Bank of America

Hey, good afternoon. The sales productivity year-over-year number of 6.2%, does that include the changes in your portfolio, as well as the gains of the previously existing centers?

Tom O'Hern

Yes, it does Craig. It excludes the dispositions that have happened subsequent to June 30, 2012. So that would exclude the recent sales that happened in May and June, as well as those that happened in the second half of last year.

Craig Schmidt - Bank of America

And your sense, if you were to break that out between the changes to your portfolio versus the pre-existing gains, how that might break out?

Tom O'Hern

Remember, there’s a pretty high productivity joint venture that was disposed of in the third quarter of last year. So on the same center basis the increase would have been more than the 6% we’ve reflected there.

Craig Schmidt - Bank of America

Okay. And looking at the two centers you brought in the New York area, Green Acres and Kings Plaza, it looks like of the two, that Kings Plaza’s going to start first?

Art Coppola

In terms of the re-merchandising?

Craig Schmidt - Bank of America

Yes, I’m sorry, yes.

Art Coppola

Both centers are in very active conversations, negotiations. Right now we are focused, but there’s been a tremendous amount of leasing activity at both centers and Bobby, do you want to comment on some of the leasing activity?

As we get into the major expenditures, we have not paid the dollar amount or the timing on either one of those yet, because those involve anchor negotiations. But the re-merchandising efforts have been very significant at both centers and our re-merchandising and redevelopment plans are crystallizing. We’re not quite ready to be more specific on the dollar spend or the exact timing, but they certainly are accelerating in terms of the timing. Bobby, you want to answer?

Bob Perlmutter

Craig, this is Bob Perlmutter. Just to respond to a couple of comments. We obviously had a strong platform in these markets, which we were able to expand, which allowed us to generate some pretty good leasing activity at both centers, pretty much off the bat.

So the development, the merchandising is well started and we are very pleased with the reception in terms of not only the economics, but the quality of the tenants we were able to bring in and the development plans, while not as immediate are making strong progress and will really allow us to take both centers and position them at the next level, which we think the markets can support.

Craig Schmidt - Bank of America

Great, thank you.

Art Coppola

Thanks.

Operator

We’ll take our next question from Christy McElroy with UBS.

Christy McElroy - UBS

Hi, good morning everyone. Tom, just regarding the Tysons REFI, I think you’ve been working on that a couple months now. Did you ultimately end up going with life insurance or CMBS lenders? I know Tysons would be treated a little bit differently than your sort of average mall mortgage, but can you give us a little bit of color on how the market changed over the time period that you were working on the financing and how competitive are portfolio lenders versus CMBS today.

Tom O’Hern

Right. No, you’re right Christie. At the time we exposed that to the market was really in early June where there’s a tremendous amount of volatility in the interest rate markets. CMBS market was in a bit of flux.

But the life companies were extremely competitive and this is going to be a combination of three top life companies that we’ve done a lot of business with and they came in and they were extremely competitive and it was their chance to grab a great piece of business. So we think we got excellent execution from some of our relationship lenders on this and that’s the direction we are going.

Christy McElroy - UBS

Okay. Having just completed Chicago and you’re in the process of leasing the Niagara expansion, but you are sort of still, first and foremost a regional mall landlord, can you give us a somewhat unbiased sense for how retailers are viewing outlet store growth versus full price today? What you think that means for factory outlet construction over the next five years and what do you think your next major outlet project will be?

Art Coppola

Sure Christie, I’ll comment on that. Look, it remains consistent, but it’s simply one of the three major distribution channels that they have. They have full price, they have off price, which is usually outlet and then they have e-commerce and they vary in terms of their percentages, but they tend to be say 60%, 65%, full price, 20 %, 25% of the mall price and 10% to 15% dot com.

Obviously there are many more off-price opportunities to build in the United States than there are full price opportunities. So if you look at new developments that they’re going into, the majority of new developments are going into are half-price.

Our next major development is the expansion of Fashion Outlets of Niagara. It’s a proven asset. The amount of GLA that we are adding there is close to 150,000 square feet, as well as re-merchandising the mall. It can amount to almost building a major new outlet property at a proven location, so that’s our focus right now. Beyond that we have really nothing else to announce on that front.

We’re pleased to be in the space. Look, as we’ve indicated previously, we see ourselves owning on one or two hands most number of outlet centers over the next five, even eight, 10 years. So it’s part of the retailer’s strategy. It’s part of our strategy, the difference being we are definitely very selective.

We obviously cannot compete in terms of size or scale. We have to compete in terms of quality, but the retailers that have joined us at FOC are with us at FON, Niagara, and are going to be coming to Niagara. They’re thrilled about the opportunities at each and it just fits within their overall distribution strategies.

Christy McElroy - UBS

Okay, then just one last quick question on the dispositions. Thanks for the breakout on the timing and the amounts. I think you mentioned the cap rate on the five assets in Q2 averaged 7.5%. Can you disclose the cap rate on the Redmond retail?

Art Coppola

No. I’m not going to disclose out of respect for the buyers, even though they are all private entities. We’re not going to get into the disclosures on cap rates by property. At the beginning of the year we indicated that we were agnostic on price, but we were very focused on timing and certainty on execution and that was really our focus. It was timing and certainty of execution.

We were not after the last penny. When we found the right buyer, we moved forward. The blended composite cap rate is a little bit better than 7.5; it’s closer to say, 7.25, but that’s brought down because of an even lower cap rate than that on the office component at Redmond Town Center.

Christy McElroy - UBS

Okay, that’s helpful. Thank you.

Operator

We’ll go next to Quentin Velleley with Citi.

Art Coppola

Hey Quentin.

Quentin Velleley - Citi

Hey, good morning. Just in terms of the same store NOI, which got you back up to 4.6% this quarter, I know that you had some drag from some of the redevelopment properties. Could you maybe just talk about the guidance number for this year and how much drag there is on same store NOI from some of the redevelopments you’re preparing yourself for?

Tom O'Hern

That would primarily be North Bridge in Chicago and Broadway Plaza. Those are both still in the same center number and there’s probably negative impact of roughly 25 basis points on those.

Art Coppola

And on our last call, I was pretty specific on this one, just to remind you. On Tysons Corner and at Queens in particular, and even at Kings Plaza and Green Acres, when you’re re-merchandising and you’re getting extremely high rents and even at Santa Monica Place, now that we’re re-merchandizing that, the frictional vacancy number could be quite significant. We don’t pull those out and call them redevelopment centers.

So I had indicated that, I think in our last earnings call that the impact could be as much as 50 to 75 basis points when you add it all up. We haven’t sat down and added them all up, because we’re not pulling them out. If we pulled them out and throw them into a redevelopment category, we will become extremely in center.

I’m not sure that we’re that different than others in this regard, but it’s extremely apparent to us than when looking at the numbers and we have such a high percentage of our income coming from extremely high quality centers and where we are constantly re-merchandising these centers; the re-merchandising efforts at Tysons are extremely significant, the re-merchandising efforts at Queens.

I’ll give an example at Queens where one 10,000-foot tenant could cause a $3 million swing in income for the year in terms of the frictional vacancy, but it’s part of raising the income from that state to 50%. But does it hit the same center NOI? Yes, significantly.

But look, we’re all in the same boat on that. Many things factor into that number, but those are quality NAV issues and that’s where I made the remark on our last call, that I believe the same center NOI can be myopic and two dimensional and forget about and ignore the NAV accretion that comes from re-merchandising a Kings Plaza or at Green Acres, but time proves it all.

Michael Bilerman – Citi

Art, its Michael Bilerman speaking. Just a question, just on I guess future potential asset sales and I recognize you sort of hit the high end of your equity target, having raised the comment with the sales that you completed, that were more low leveraged, but you did expose the market to upwards of $1.5 billion of potential assets.

How do you sort of look at the assets that you’ve now kept? Was it the market pricing that wasn’t there? How do you sort of think about putting capital into those assets, getting employees driven about those assets, that they were on a sale list and are now not?

Art Coppola

Michael thanks for the question. It’s actually been a good process. Our asset management, leasing and finance teams put a tremendous amount of work into the preparation of the books and the offerings that we’re in on some of these assets. Frankly, it caused the senior management to have a renewed focus on the assets, just as part of the market, as part of giving an overview of a number of assets to perspective buyers.

We sat there and talked about assets in great detail, with outsiders that we frankly don’t spend that kind of time talking about internally a lot of the time. So if anything, I would say that the assets that are not being sold, have a renewed focus and a renewed energy. It’s frankly gotten us a little bit re-acquainted with the assets, because it is easy to have your focus be primarily on the top 10 or 15 or 20 assets, where the vast majority of your income is coming from.

Do we want to be in that business of owning some of our bottom tiered assets forever? No. Do we think that we can make the ones that we’ve retained better? Yes. Is there a strong probability that we’ll continue to dispose of assets, including the ones that were marketed that did not sell at this point in time? Yes.

Look, from the buyer’s perspective, they took the low-hanging fruit for them. They cherry-picked to some degree and we were okay with that, because we were after certainty of execution and we didn’t dislike any of the assets that we put out there and we are happy to own the ones that we retained and I think that we’ll actually have better performance on those assets as a result of going through the process.

I also think that there will be continued dispositions of not only assets that were exposed to the market, but possibly some others, but that’s part of the grand strategy of focusing our efforts on fewer assets, but bigger assets and pruning the portfolio over a period of time.

We completely retooled our balance sheet to levels that existed before the $1.7 billion of acquisitions that we had last year. Our development pipeline is completely self-funded, FOC is open, Tysons is even pre-funded with this refinance and the future development pipeline that’s sitting out there, which is quite significant, we have essentially a completely untapped new five-year line of credit available to us to fund that.

But internally, my long-term and our long-term goals would be to fund that development pipeline through continued pruning of some of our non-core assets and we intend to do that and the market is still there to do that.

Michael Bilerman – Citi

Did anything fall out, I guess in sort of everything that happened in late May or June that you were sort of working on that got materially re-priced for those assets. Just trying to get some color on the marketplace.

Art Coppola

There was one contract that coming right up on the go-hard date or the end of the due diligence date, the buyer asked for price adjustments and we terminated the contract and that happened in late April.

Michael Bilerman – Citi

Okay. Thank you.

Operator

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

Cedrik Lachance - Green Street Advisors

Thank you. Just thinking about the expanding strategy you talked about in the past, Art, since Fiesta Mall is doing special servicing. It’s one of the malls I think had been targeted for that strategy. What does it tell us about how deep and wide you can go in terms of the Hispanic focus strategy and what’s happened in general to the malls where you’ve implemented the strategy?

Art Coppola

There is really no message there, other than we probably should not have – we tried to put it into the marketing program that is targeted, that we call the Vanguardia and we didn’t give a lot of traction, because as we looked at the trade area demographics, we didn’t have a percentage-wise or population-wise, the concentration of Hispanic population in the Fiesta trade area immediately.

On top of that you’ve got a tremendous amount of retail in the southeastern part of the Phoenix marketplace. So to me it was no message, other than maybe we shouldn’t have even included it in our Vanguardia marketing efforts. When you look at the other properties that are in that program, they’ve been achieving same center NOI growth that is in the 5% to 6% neighborhood over the past three years since we really initiated the program.

So we’re pleased with the progress on the pure-plays that we’ve got in there, which are really Panorama Mall, Desert Sky, Pacific View and we’ve had good success there and it’s really just more of a marketing approach. For me there’s no message on Fiesta.

Cedrik Lachance - Green Street Advisors

Okay. In regards to Fashion Outlets of Chicago, I think in the past you had talked about roughly $900 per square foot as being a target, once the property is stabilized. Is that still the prospects for the asset or do you think it’s changed given what you’ve observed with the grand opening?

Art Coppola

Honestly, I hope I never put out a number like that. Somebody may have made reference somewhere along the line that a retailer generally would have to have expectations that would be in the $500 a foot to $1,000 a foot to pay the rent that they pay, but I don’t remember ever putting out any numbers along those lines. The numbers are going to speak for themselves.

Look, when you’ve got retailers that are telling you that the vast majority of them – we had people tell us that in the first four hours on the grand opening day, they achieved their entire objective for the four day grand opening weekend. A tremendous number of retailers told us that it was either their best ever or their second best ever opening, ever.

So we put that into the context of the outlet industry, put it into the context of where it’s located, put it into the context of what you see when you walk the center, yesterday, Monday at 4:30, we still had 60 people in line to get into a Tory Burch store. You had products; stores were locked because they had too many people inside with the line outside.

All expectations are that it’s going to be great, but until the numbers come through, let’s let the numbers speak for themselves.

Cedrik Lachance - Green Street Advisors

Okay, I might have misremembered that. And then just finally, in terms of when I look at your community and power center bucket of assets, if you were to think three to five years out from now, how many of the 10 properties that are listed here do you expect to have still under ownership?

Art Coppola

None.

Cedrik Lachance - Green Street Advisors

Good. Thank you.

Operator

We’ll go next to Vincent Chao with Deutsche Bank.

Vincent Chao - Deutsche Bank

Hi, hey everyone. Just want to go back to the disposition conversation just a little bit. In terms of the ones that didn’t sell, I know price wasn’t your main driving focus there, but in terms of just overall demand for the ones that didn’t sell, as well as the price indications you were receiving, how did that compare to your expectations going into the process?

Art Coppola

I don’t want to be cute with you, but when I said I was agnostic, I was truly agnostic. We had expectations that we could achieve dispositions in the $500 million to $1 billion range in the mid-7’s we did. There are continued conversations that are going on and we’ll see what happens.

We were execution focused, not price focused. Look, at the end of the day, we disposed of assets that were maybe 4% of our NOI. So negotiating for the last 1% in price was not what it was all about.

Having certainty of execution and getting it behind us, closing deals within five months of the time that you go out with an offering memorandum, it’s really an incredible achievement, given the process of getting the OM out there, and the property tours, due diligence periods, estoppel periods, I mean that’s really a very short time if you look at the marketing of the major properties that have historically taken some significant time to sell.

So we’ve achieved our goal, which means we achieved our objective. On the other hand, we do continue to have interest from folks and we will continue to have one-off conversations with folks and anything that happens from this point forward will be incremental, but you shouldn’t have it in any of your numbers.

We’ve got plenty of room in our numbers and our guidance ranges that if anything happened in the way of dispositions, it shouldn’t affect our guidance numbers in terms of our range. And as part of our long-term goal, we remain committed to rotating out of the bottom 25% or so of our portfolio and reinvesting that money into the top 25% of our portfolio.

Vincent Chao - Deutsche Bank

Okay, thanks. I was just trying to get a sense of sort of the broader demand for that group five type of asset, but that’s fine. Just maybe going to the sales trends in the portfolio. Can you provide some color on sort of geographic and sales categories that showed some strength?

Art Coppola

Going back to your other question, in addition to the people that actually bought deals, which I think we had three buyers, there were another eight or 10 groups that put in offers, so there was plenty of people out there. But again, we achieved our objective. In terms of regional sales activity Bob, do you want to comment on that?

Bob Perlmutter

Year-to-date, our strongest regions are the East Coast and Arizona.

Vincent Chao - Deutsche Bank

Okay. And any color on sales categories that stood out for you in the quarter?

Art Coppola

Categories that have done the best, include home furnishings, jewelers, athletic footwear and apparel and then we obviously see certain brands like Michael Kors and Lululemon continue to have very strong increases.

Vincent Chao - Deutsche Bank

Okay, thank you.

Art Coppola

Obviously Apple has to...

Bob Perlmutter

Right, the trend for Apple was down in the second quarter, but obviously they are still a very productive and very important tenant for all the centers.

Vincent Chao - Deutsche Bank

Okay. Thanks guys.

Operator

We’ll go next to Samit Parikh with ISI.

Samit Parikh - ISI

Good morning. I noticed in the quarter your tenant recovery ratio was up pretty significantly from last quarter and up pretty significantly year-over-year. I guess my question is, is that something timing related or is it really just a product of a stronger portfolio today?

Tom O'Hern

Well, it’s a combination. To some extent you get some timing differences between the first and second quarter, but I think in general it’s as a result of the quality. You keep in mind that we also have tenant recoveries that are based on CPI increases that typically come into place. It’s no longer a triple net environment. In most cases about two-thirds of our leases have fixed CAM. So to the extent we can control our costs, which we are doing an excellent job of this year, we also see some benefit on the recovery rate there, but it’s a combination.

Samit Parikh - ISI

Is it safe to say that we should see that benefit for the remainder of the year?

Art Coppola

You will. You may not see it at the same level. I mean there can be some difference, timing differences on when the expenses flow through and so in an environment that’s not a triple net environment, you’re going to see the recovery rate fluctuate a little bit more than you would in the triple net environment.

Samit Parikh - ISI

Okay. How much temp space do you have right now?

Tom O'Hern

Well, included in the occupancy, there’s about 6% is tenants that we consider to be greater than six months, but less than – they are up to a year, six months to a year is what we consider temporary. If the space is less than six months we don’t include it in our occupancy status.

Samit Parikh - ISI

Okay, that’s helpful and then I guess last question Art, what sort of level of caution do you think that you are building into your guidance for the holiday season this year? It seems to us based on what you’ve done in the first half of the year and even considering some of the dilutive activity and given that sort of the Chicago outlet’s, NOI will be coming on for the rest of the year that there is some level of being conservative there. So would be great if you could comment a little bit on that.

Tom O'Hern

Well, I mean there’s always a certain amount of guesswork, particularly in the categories of tenant recoveries and percentage rent. We’ve taken a hard look at recoveries, we probably have visibility that goes out 90 to 120 days and that’s why we cut our guidance there.

So, I think you have to keep in mind that that’s part of our guidance number. It was a reduction of about $0.03 a share for a more cautious view of tenant recoveries. In terms of percentage rent, it’s hard to predict what the tenants are going to do in the fourth quarter. Most of the percentage rent comes through in the fourth quarter. We give it our best estimate, but you don’t truly know until you’ve made your way through that quarter. So that’s why there’s a range in there at $0.10, because there are some things that are more an estimate than a certainty.

Art Coppola

You do have projected relatively very low bad debt numbers. We, in terms of caution, it’s really the reverse of that, given our visibility into the future, potential termination pipeline. We’ve reduced dramatically our original numbers that we had internally for termination income, which we normally get termination income when a tenant goes away and they still have credit. So that actually goes the opposite direction.

Look, we are trying to keep the noise of having great same center NOI growth, coupled with the noise that comes from the dilution of dispositions to a minimum. So that drove us to really wanting certainty of execution on the disposition.

It does, I will tell you give us especially as we raised guidance last quarter and we raised guidance this quarter, it probably leaves us a little bit conservative, because if for some reason there are dispositions that do occur between now and the end of the year, that obviously would be dilutive, we wouldn’t want to be in a position to be busting our guidance range as a result of that.

So if there is any caution or conservatism that’s built into the numbers, it’s not operational; it’s probably more on the disposition side.

Samit Parikh - ISI

That’s very helpful. Thank you.

Operator

We’ll go next to Todd Thomas with KeyBanc Capital Markets.

Todd Thomas- KeyBanc Capital Markets

Hi, thanks. Jordan Sadler’s on with me as well. I just had a question. Going back to the tenant sales, I was just wondering if you can share with us what sales growth was in the quarter. So its just comparable tenant sales in the quarter, not on a rolling 12 month basis.

Tom O'Hern

We don’t typically break it out by quarter. I mean, I think to get a sales trend we typically feel you need 12 months there. So historically, that’s what we’ve reflected is the trailing 12 months.

Todd Thomas- KeyBanc Capital Markets

Okay. A question for Bob, it sounded like recently, while there’s a lot of discussion about retailers down-sizing sort of broadly, that you were seeing some demand from larger retailers looking for bigger boxes, so Forever 21’s of the world and a few others.

I was just wondering, is that sort of isolated to a few specific spaces in your malls or do you think that that’s a trend that you’re seeing gain a little more momentum than you have over the last few years? And how big will some of these retailers go?

Bob Perlmutter

What we are seeing is the desire for space at the top tier centers. It’s really led many of these tenants to look at configurations and sizes that are more than just the profitability of that individual location.

So at some of our centers like Queens and Tysons, where spaces are at a premium, we’ve seen not only the traditional retailers like Forever 21 and H&M, who have always been willing to work with a two level box. We’ve seen some more traditional tenants like The Gap, potentially Victoria’s Secret and some others start to look and look at these locations as key to their business operations in the entire region, as opposed to just on an individual basis.

So historically the thought was always to take a big space, carve it into small spaces, increase your rent and what we are really seeing at the top tier centers is almost the opposite effect, where we are able to accumulate bigger spaces, many of the retailers stepping up and creating premium rentals.

Todd Thomas- KeyBanc Capital Markets

Okay. So it’s mostly isolated in some of the top tier centers, you would say?

Bob Perlmutter

Yes.

Todd Thomas- KeyBanc Capital Markets

Okay, and then just a last question for Tom. I just wanted to clarify; I think you said you cut guidance by about $0.03 a share for tenant recoveries. You mean lease termination fee income, as opposed to tenant reimbursements, is that right?

Tom O’Hern

Yes, that’s correct, Todd, termination revenue.

Todd Thomas- KeyBanc Capital Markets

Right. Thank you.

Art Coppola

Thank you.

Tom O’Hern

Thank you.

Operator

We’ll take our next question from Ben Yang with Evercore.

Art Coppola

Good morning, Ben.

Ben Yang - Evercore

Hi, good morning. Just another question on guidance. I totally understand why you keep a wide range, given obviously the typical unknowns, the noise, the conservatism, but your prior guidance did have $0.07 to $0.14 of dilution from the asset sales and it seems like the guidance range should have at least narrowed, just based on having wrapped up that process.

So it is still a little curious that the guidance range is still $0.10 and especially since you have more clarity on lease termination fees. So maybe asking it in a different way, is there anything in the back half of the year that you feel is maybe more uncertain than when you first established guidance.

Art Coppola

Well, like I said, the disposition side of things could still have a meaningful impact.

Ben Yang - Evercore

I thought you said that that was pretty much wrapped up for the year.

Art Coppola

I did say that and that is true. I also said that we are committed to continuing to prune our portfolio; that people are continuing to talk to us; that we are not under contract with anybody, but it is not out of the question that something could happen on that front that could still be meaningful.

And so if that goes beyond this month, this quarter or this year, that’s something we’re committed to over a long period of time and obviously having had a number of assets in the markets that still could have an impact.

Tom O’Hern

A couple of things on that. That $0.10 range on the FFO, even if you use the mid-point, that’s less than 3% of the total FFO. So I still don’t think that’s that wide of a range, given that you have the most volatility in the fourth quarter as it relates to specialty leasing.

In the fourth quarter you get a third to half of your full year specialty leasing comes in, that’s a little hard to predict, as well as percentage rents. So typically the most volatility is going to be in the fourth quarter and that’s why we keep the range.

Ben Yang - Evercore

Okay. It just seemed like the impact of asset sales, if you can get them done even this year just would be very modest I guess to your numbers, but that’s fair enough, I guess.

Tom O’Hern

There’s not a lot of the year left. I mean if there were to be additional dispositions, the dilutive effect on 2013 would be pretty minimal in my opinion.

Ben Yang - Evercore

Okay. That’s what I was thinking as well.

Art Coppola

Given where we are, I hear your comment, it’s noted, recorded; I understand it. There are a number of things that are still out there, including the dispositions that could affect that number, but I understand your appetite to see a tighter range. We’ll keep that in mind for the future.

Ben Yang - Evercore

Right, and then just a final question for Tom. I think you made an earlier comment; did you say that the dispositions actually hurt the reported growth and sales per square foot, that if the you...

Tom O’Hern

Year-over-year, they did. Yes they did.

Ben Yang - Evercore

Can you quantify how much the impact was from…

Tom O’Hern

It’s about $5 a foot.

Ben Yang - Evercore

So if you didn’t sell any assets year-over-year, your portfolio sales would be $5 higher; that’s the interpretation.

Tom O'Hern

The spread would be $5 wider. Yes.

Ben Yang - Evercore

Okay. All right, thank you.

Art Coppola

Thank you.

Operator

And we’ll go next to Alexander Goldfarb with Sandler O’Neill.

Alexander Goldfarb - Sandler O’Neill

Yes, good morning out there.

Art Coppola

Very good. How are you?

Alexander Goldfarb - Sandler O’Neill

Hey, how are you? First question is for Tom. Tom, in the first quarter I think your guys ended line of credit balance was $635 million. You raised $630 million of net proceeds and the line of credit is now $405, which sounds like you spent $400 million. So maybe there’s some stuff that closed post quarter that’s not in there.

But just sort of want to understand; one, what some of the spending was in the quarter, and then two, the line of credit is already sort of at a healthy amount and you guys haven’t started on the redevelopment program. So just sort of curious what your thoughts are for managing the line of credit as balancing the redevelopment projects that are in the shadow pipeline.

Tom O’Hern

Yes, I’ll walk you through that, Alexander. We did pay off the FlatIron mortgage, which you probably don’t have factored in there in your cash flow analysis, but at the end of the quarter, we’ll start there and go forward, was $405 million outstanding at June 30.

We subsequently sold Redmond Town Center, our share was about $63 million. So that would go against the $405 million and on top of that, which hasn’t happened yet, is the Tysons financing, which we expect to happen August 30 or September 1. That should be another $275 million. So with that, the line of credit will be under $100 million.

There will be additional borrowings on the Tysons project, which will come through there, but I would expect we would end September with a line of credit balance probably well under $200 million and I would expect it to not be much more than that by year-end and that’s absent any additional asset sales.

So we’re in great shape and as you hopefully noticed, we renegotiated that line. We’ve got $2 billion of capacity and the maturity date’s been extended to 2018, as well as we tightened the borrowers spread to 150 over LIBOR. So the balance sheet’s in great shape and in particularly the line of credit.

Alexander Goldfarb - Sandler O’Neill

Okay, then that’s helpful. Yes, I did notice the line of credit, the increase on your credit card capacity.

And following along on the redevelopment/development, the shadow pipeline moved around a little bit from first quarter to second quarter. Art, you spoke a little bit about it, but sort of the big picture, as you guys map out what you want to do for the next round, is that more driven by what anchors want to do with their space or potentially coming to a mall or development or is most of this shifting around and timing and spend more driven by small shop opportunity?

Art Coppola

Actually neither. If you look at the shadow pipeline in particular, because the actual process pipeline is I think very specific between FOC, FON, Niagara and Tysons Corner, but you go to the shadow pipeline.

It’s really more the fact that most all of these, Broadway Plaza, Green Acres, Kings, Cerritos, even the new center to be built at Goodyear, they’re all going to be extremely meaningful in terms of what they are going to do for us, and its really a matter of recognizing that these are generational opportunities, and while we want to give you a visibility into the future as to what’s out there, we also want to not rush into construction and miss a generational opportunity by being hasty.

So it’s really if anything an appetite to just make sure that we don’t leave any NAV value creation opportunities on the table, given the fact that most of these opportunities are really generational in nature.

Alexander Goldfarb - Sandler O’Neill

Okay. And then just finally, Queens Center; I think you guys still had, whether it was additional level to add on top or I think there was also a parcel adjacent, but just given the productivity of that center and also that you are talking about doing Green Acres and Kings, is there any potential to seeing Queens Center on the shadow pipeline in the near future?

Art Coppola

Not likely. If it does, we’ve got estimates of going up and converting some of the top level parking deck to retail. Those dollar numbers are not huge. They were in the $25 million zip code and we just have not to date found the right tenant to take two level spaces that would incorporate that space at the right returns to make sense of that.

Do I think that will happen over time? Yes, I do. We’ve got 40,000-45,000 feet of FARs sitting up there on the top level deck, where Macy’s currently is open for business on their fourth level above the concourse for future expansion, but it’s not something that we would pursue without getting the right returns and it’s not even something that would make shadow pipeline today, but it is in our FAR.

Alexander Goldfarb - Sandler O’Neill

Okay. Thank you.

Tom O'Hern

I think we’ve got time for one more question, operator.

Operator

We’ll take our final question from Michael Mueller with JPMorgan.

Michael Mueller - JP Morgan

I guess looking at the redevelopment pipeline, what are the obstacles you have to get past or what do you have to get comfortable with to move forward with Broadway and Estrella in particular?

Art Coppola

Broadway I think we’re going to be in a position to be very specific on our next call as to the timing of demolition, as well as the reopening dates. I’d rather not get into the specifics of the one or two approvals that remain at Broadway at this point in time; it wouldn’t serve our purposes.

At Estrella, the opening date budgeted there was 2016, 2017, given the anchor level of interest is still looking solid and we are not at the point of doing pre-leasing at this point in time, other than collecting anchor interest and the anchor interest is there to build. So really again, given the generational opportunities that there’s really only going to be one full priced mall built in Phoenix probably in the next number of years, we just want to make sure we get it right and we want to make sure that we have the proper amount of wind in our backs in terms of specialty store leasing when we actually go ahead and open it.

So they are on the same pipeline, because we think we are going to do it. They haven’t moved up to the in-process, because we haven’t announced exact dollar figures and exact dates yet. My anticipation is virtually everything there on the shadow pipeline will move up to the top, to the in-process over the next six months to nine months.

Michael Mueller - JP Morgan

Got it. Okay, that was it. Thanks.

Art Coppola

Okay. Well, thank you very much for joining us and again, for those of you that still have pending questions, feel free to reach out to any of us and we are happy to address any of your questions.

Thank you for joining us and those of you that joined us on the property tour of FOC, next time you’re in Chicago it’s a five minute quick trip on your layover to hop over and take a look at the real live thing. We really did open it. It really is occupied and it really is doing good. Thank you very much.

Operator

Again, that does conclude today’s presentation. We thank you for your participation.

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