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Executives

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

John Perry - Senior Vice President, Investor Relations.

Analysts

Ross Smotrich - Barclays

The Macerich Company (MAC) Barclays Capital Global Financials Conference Call September 10, 2013 9:00 AM ET

Ross Smotrich - Barclays

Okay. I think we’re going to get going. Good morning, everybody. My name is Ross Smotrich, I'm the REIT Analyst for Barclays. And we’ll try and keep it on time here for the purposes also of the webcast. So, it’s my pleasure to introduce Tom O’Hern, Senior Executive Vice President and Chief Financial Officer of Macerich. Macerich, an S&P 500 REIT focused on the ownership development and REIT development as well top quality regional miles nationally. He’s joined by his colleague John Perry, he is SVP of Investor Relations.

Just by way of background, prior to joining Macerich, Tom was the CFO of several commercial real estate companies primarily focused on in the retail space, he’s a CPA with experience with our Dana Anderson, he’s also a member of the board of another REIT called Douglas Emmett. So, we’re thrilled to have Tom represent the Macerich story and when he’s is done we’ll have some time for Q&A. Thanks.

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

Thanks, Ross. As Ross, said Macerich is a mall company that’s our primary focus. And we’ll roll through the slides fairly quickly if I can find the advanced button here. Here we go, we can pass through that and that’s for the legal guys, okay. We were – we went public in 1994 as Ross did my bio, I’ve been at Macerich for 20 years for the period of time before that it almost forgotten. When we went public we were opting $600 million and we grown to about $15 billion in total market cap today. In May, we joined the S&P 500.

Really, for us it’s all about growth and there is two aspects of our growth story internal growth and external growth. We’re relatively unique amongst mall companies in fact most REITs in that we structure our leases with CPI increases annual CPI increases, that’s for a variety of reasons but our goal is to see some increase from those leases every year which doesn’t happen if you have fixed bumps that get straight lined. Today, about 95% of leases we write or written with CPI increases so we expect that 65% or so to roll up close to 90% with the net for the last two or years is a process we can underway with the last six years.

We get about 10% of our space every year on average that we get through lease expiration and we have the opportunity to roll those leases up to market. Over the past few years we’ve averaged mid teens positive releasing spread. So, that picks up roughly 1% to 1.5% of what we call same center EBITDA growth in a given year depending on your CPI assumption if you use two for example that gets to the 3% growth and then if you throw in occupancy in this year we’ve had a nice gain of over a 100 basis points as well as the conversion of temporary tenant occupancy to permit tenant occupancy. We expect to see 3.5% to 4.5% same center EBITDA growth in any given year.

Also, we’ve had a strategy of disposing of less productive assets that have slowed that growth, that improves the quality of our portfolio as well as the growth prospects and year-to-date we’ve disposed about $530 million worth of such assets. We’ve also been extremely active in the last couple of years in taking advantage of this generational low interest rate environment. We’ve done over $3 billion of financing, we’ll show you a few examples of that but we’ve done a number of things, we’ve reduced our floating rate debt significantly, we’ve extended our debt maturity schedule from roughly three years to about six years. And we’ve also reduced the overall average interest rate.

External growth comes from two primary areas, development and redevelopment. We have a pretty significant pipeline of a $1 billion to $1.250 billion over the next five years, we’ll some details on that in a few minutes. We typically see strong returns estimated returns on our developments and redevelopments are 8% to 11%. In addition, we’ll do some selective acquisitions, it’s hard to predict these but as I say that I can also point back to last 12 months where we had that $1.7 billion of acquisitions of high quality regional malls.

On the financing front, some of the details you can look at some of these deals probably the low point was Scottsdale Fashion Square, March 2013 we did a 10 years financing on a $525 million deal right at 3%. It’s still good the most recent deal was Tysons Corner which we just did about a month ago and that was a 10 year deal at 4% and we’re in the market today with Flatiron Crossing and that looks to be very competitive as well, we expect to get a 7-year to 10-year deal on high 3s low 4s. So, it’s been a good market, we’ve taken a significant advantage of that and really improved our balance sheet very dramatically.

When you look at the purchase activity over the last year, have some high quality assets some of which you’re maybe familiar with here in the New York market. The most recent acquisition was in January Green Acres mall and we acquired that as well as Kings Plaza from Vornado to very high quality assets, great additions to our portfolio, we think we’re going to get some great synergy there along with our Queens Center which we own for sometime. And we also bought out some of our partners in the case of Arrowhead Town Center in Flatiron Crossing, some very active deals which will get into some more specifics in a moment and on the disposition front, we’d dispose of six assets and those were performing significantly lower than our portfolio average. So, as a result of disposing those there is some mild earnings dilution but we improved the quality and we’ve improved the growth aspects of our portfolio.

The balance sheet today about $15 billion. If you look at the debt metrics, debt-to-market cap 43%, interest coverage ratio a very healthy 2.9 times. Debt-to-EBITDA which seems to be the one metric everybody focuses on which I would argue there is at least three or four they’re just as important, bebt-to-EBITDA 7.9 times. The average interest rate, 4.3%, average debt maturity six years that compared to the beginning of 2012 when it was 3.2 years not on here is the floating rate debt percentage which is down to 13% as of today, that compared to 28% at the beginning of 2012. One other benefits that’s not noted here is concurrent was being added to the S&P 500 in May, we used our ATM program this year $171 million worth of equity and that was at $71 of share very effective offering this REIT offering.

And here is the maturity schedule. The thing that’s probably most important here is our goal here is the layer out each year 2018 as a line of credit couple other big maturities. But our goal over time is not that any too much in any one here maturing. And you’ll notice in 2014, 2015 and 2016 the average interest rate at the expiring debt is 5% or higher. So, even in a raising interest rate environment, we should still end up reducing our overall average interest rate because of the high coupons on those maturing loans. So, I would say today our Macerich is very interest rate insensitive and everybody likes to keep in the REITs with the big brush and say they’re extremely interest rate sensitive. But in our case we don’t have lot of financings coming up and the ones that are coming up are significantly above market rates today, that combined with the fact that a lot of our leases have CPI increases that if we do see a raising interest rate environment, I would argue that we are relatively insensitive to that.

Also, because there is pretty strong bank markets during this year we have the opportunity to recapture our line of credit. We extended that out another two years so the maturity is 2018. The current balance on that line after recent activity is only $165 million and that could go to zero if we put the financing on Flatiron Crossing in place Flatiron is currently an unencumbered asset. So, that would take our line down to zero. This line is also expandable, it can go up to $2 billion. So, this facility gives us great pricing and great capacity as well as extending out the maturity schedule.

To the key metrics operating metrics, everybody seems to focus on with regional malls or sales on occupancy. You can see the trend here of last 10 years, we’ve always had relatively high occupancy even during the recession 2009, 2010. The sales are back again significantly above the pre-recession peak of 467 in 2007 and those continued to get stronger that’s not only as a result of sales growth on a same center basis but also an improving portfolio adding assets like Green Acres and Queens and selling less productive assets in tertiary markets. Demographics are areas that have strong metropolitan markets and we’re moving away from assets in more tertiary markets those are the assets we’re disposing of.

Something to note here is that although we have 58 regional malls about 87% of our NOI comes from our top 40. And our lower average sales per foot are $545 if you look at those top 40 centers they do $600 a foot a very high quality portfolio its quite likely over the next three or four five years that the lot of those bottom 18 assets may no longer be with us if the disposition market is strong we’re an opportunistic seller we may dispose some of those.

This shows the least expiration schedule. As I mentioned earlier when we were talking about growth we’ve got 10% of our spaces that rolls every year that gives us the opportunity to change the tenant mix to re-merchandize. But probably just as important is to mark those rents up to market then as I said over the last few years we’ve got mid-teen increases on releasing spreads. And if you look at the map here it kind of shows the spread across the country but in reality we have five markets that we really focus on.

First is in the Northeast if you take New York, Connecticut, New Jersey down to the Washington DC market that’s our biggest region today we’ve got about 31% of our NOI comes from that region. Next if you go to the West Coast and you take the Pacific Northwest and Northern California is another region that clearly significant for us. Third region being Southern California, fourth region being Phoenix and the fifth region which is relatively small today but growing and that’s the Chicago market. The other areas we consider non-core where you see assets in Utah and Colorado.

And this is the percent of the NOI of the portfolio broken down by state but if you grouped it by region and you took New York, New Jersey and Connecticut and Virginia that’s about 31%, Arizona is roughly 18% today, California 27% roughly split about two thirds in Southern California, one third in Northern California.

Now taking a quick look at some acquisitions, Arrowhead and Flatiron were two opportunities where we are partners. In one case JC Penny was our partner in Arrowhead and they chose to monetize their position we were more than happy to oblige this is something that we work on it constantly is buying out our partner you never know when its going to happen but that was a very efficient transaction, very accretive transaction. You can see it’s a high quality asset doing over 650 foot sales with almost 95% occupancy. Flatiron Crossing was another to buy out our partner. They’ve seen a nice return, the shorter their holding period the better their IRR. So, we’re able to buy them out again a fairly attractive deal for us in a high quality center with good operating metrics.

And on the two centers we bought at the end of last year beginning of this year from Vornado here in New York Kings Plaza great center does over $680 a foot in sales, 95% occupied, very dominant center. We’re able to put some very attractive financing on that center concurrent with the acquisition. Green Acres mall the other great center where we think there is a significant opportunity to market rents up to market also very productive at 94% occupied, did almost $550 a foot in sales.

Some more detail on these but the key thing here is if you look at the map what wasn’t evident from the first couple slides is that we own Queens Center and we bought Queens in 1995 it was a great asset demographics were great. We didn’t know exactly what we were going to do but we felt there was a significant opportunity to improve that center, change the tenant mix. We knew that there was demand and we could expand and we just didn’t know at the time we bought how we were going to do that. Over the years we’ve been to double the size of that center, sales have gone from roughly $550 a foot to almost $1,000 a foot and we see similar characteristics in Kings Plaza and Green Acres great locations, market dominant. We think that over time there is going to be opportunity to do some expansion and although it may not be evident exactly what that’s going to be today we think its going to happen. We were able to buy an additional 20 acres next to Green Acres for some expansion there. And meanwhile the leasing on both Kings Plaza and Green Acres in the period of time we own them has been very robust and our leasing teams are extremely excited about these two assets.

Development, redevelopment, this is something that is Macerich has been doing this since they got in the mall business in 1972; it’s a patient process getting entitlement sometime can years. We’ve operated in difficult places like Santa Monica, California, Boulder, Colorado places that are clearly no growth but that where we’ve had some great success.

In the category of what have you done for me lately, August 1 we opened fashion outlets in Chicago. This is a stone throw from O'Hare Airport two level fashion outlet center. It’s in the City of Rosemont, which is very business friendly. It opened at 94% occupied, great project there is still lines – if you go there today there is still a line of, almost anytime the day a line of 50 or 60 people out front of Tory Burch. I am not sure exactly what they’re giving away but a month later after grand opening they’ve still got people lined up out front. It was a great project for us about a $200 million project where sell 11% return. It’s a very, very accretive good NAV creator.

Another project that’s underway today is the mixed-use densification of Tysons Corner in McLean, Virginia. This is a 2.1 million square foot super regional mall, its one of our most productive centers. It’s – even on it’s own it’s an absolutely tremendous asset. And we had the additional benefit of a metro station was just completed and it is contiguous Tysons Corner that obviously brings a lot of people to the location. We got the entitlement to do mixed-use so we’ve broken down 19 floor office tower that’s got some retail amenities below it. We have also are going to be building a 30 story residential tower and there is going to be Hyatt Regency in there about a $500 million project are expected to return as 8%.

This is a look at the building lower left side you can see where it connects to the metro there is a platform in the middle there for restaurants and entertainment in and around at the office the residential in the hotel. It’s a great project the residential for example is about two third lease today Intelsat the big satellite provider has a big piece of that as there is Deloitte LLP and there is a couple of banks buying for two or three floors on the lower level so very exciting project that’s going to be complete – completed and phases starting in 2014.

And then we got an expansion other way of fashion outlets in Niagara. We’re able to buy a contiguous piece of property, there is pent up leasing demand there that hasn’t been satisfied so that’s underway and we expect that to open in late 2014 or early 2015. Again this all these redevelopment project should drive NAV as well as helping our NOI growth. And that’s it. Open it up to Q&A.

Question-and-Answer Session

Ross Smotrich - Barclays

Great. Thank you. Mic is on, I guess. So, are there any questions here from our guests? So, I guess I’ll start. I guess this is a little bit more of a macro question on the mall space. The mall seem to be trading lately this concern that same store sales growth is slowing a little bit and I am wondering how you think about that, number one in terms of the resiliency of your cash flows versus same store sales?

Tom O’Hern

Really in our business you can’t look at the retailer’s sales growth in any given month or even any given quarter. If we look at how robust the leasing has been, it’s been pretty significant even though retail sales have been slowing somewhat we’re going through a number of years of retail sales growth. And keep in mind that most of our leases are 10 year leases. So, by the time those leases expire that tenant sales have typically outpaced the underlying rent that’s why we get the positive releasing spread. So, if you look at A quality malls and I would say that 40 of our 58 clearly are A quality if you look at the sales of $600 a foot, our leasing has been strong its very little new capacity. You take the top centers in the country the occupancy level is probably 94%, 95%, whatever space becomes available there is going to be good demand there. So, it’s a much longer view than just a month or a quarter or even two quarters and I would say that across the top of our sector in the A quality space leasing is very, very strong. And I would as a result not expect cash flows and NOI growth to taper.

Ross Smotrich - Barclays

Perfect, so what do you think is driving the strong leasing? I mean I think that a lot of people are concerned for example about the impact in ecommerce on retailer demand for space, curious what you’re seeing in terms of leasing demand what’s driving it, what the possible concerns are?

Tom O’Hern

I just had a flashback because I thought you already asked me that question in 2000.

Ross Smotrich - Barclays

I did. Back then it was relevant this time it’s as well.

Tom O’Hern

Now look e-commerce has been around a long time and the reality is it’s more of a benefit to our retailer than a detriment. I mean our retailers really have three avenues of distribution through the internet, in their primary stores and in their outlet stores and that’s been success for most of them and if they’re success we’re going to be successful so. That’s more of an asset been a challenge I think in terms of the leasing activity the reality is there is just not a lot of space there is not a lot of A quality space and retailers have to grow they have to grow their top line as well as their same center numbers so.

When they have the opportunity to take a space in Santa Monica place or Tysons Corner or to renew their lease they’re going to do it. I mean they can’t look back and say, well I am not going to renew that lease because sales haven’t been that good the last two quarters. They’re going to probably look at that space and say, my sales have been pretty good in that space or I’d like to be in that center, all my competitors are in that center and there is only one space that’s coming up between the 40 yard line I better take it and I am not all that sensitive to what the rent is by the way.

Ross Smotrich - Barclays

Right, so you think this is sort of a sustainable trend in other words retailer demand open to buy will continue to be strong for the foreseeable future.

Tom O’Hern

That’s our expectation.

Ross Smotrich - Barclays

Okay. Again I am going to look to you guys if there are any, yes please.

Unidentified Analyst

(Question Inaudible)

Ross Smotrich - Barclays

Tom, do me a favor. Just repeat the question for the sake of the webcast.

Tom O’Hern

Yeah, the question was of all the retailers that are operating on the internet as well as with bricks-and-mortar how the smarter ones handling their allocation of capital and their space requirements. I think we’ve seen a refinement over the last 10 years where you see a lot of retailer that if they’re smart they are assessing how much space they really need. You had a pretty good time there when GAAP would take regularly take 8 to 10,000 square feet and they refine that, they take much less space today they find they’re more efficient and for us we’re better off I mean we’d much rather have them doing $600 a foot out of 4,000 square feet than $400 at 8,000 square feet.

That’s one example of a company of a retailer that has gotten more efficient over time use the platform to their benefit. I mean in many cases it’s a showroom for the better retailers and they use that as a showroom and they use that to get people excited when they come in the store to actually make the purchase or to close out the transaction. And there is a lot of example of that that are pretty good to cap that’s the one that comes to mind that’s really made some big changes in their space requirements over the years.

Unidentified Analyst

Do you see them still making changes moving to the double-digit amount they know exactly where they need to go?

Tom O’Hern

Well I think it’s a continuing process I mean if you look at Best Buy they made a big move to reduce the size of their space become more efficient try to drive gross margin in a low margin business. I think its constantly evolving and I think they have to continue to be more efficient and make their space more efficient to survive and keep their margins up.

Unidentified Analyst

It seems like your retailers on internal consider just making them more profitable but more of the sales are moving towards the internet so I realize average rents are small percentage of your overall mix but, would seem that more of your sales are going to go towards more of the retailer sales are going to go towards the internet. I mean how do you see this playing out?

Tom O’Hern

We’ve been watching for quite a few years. And the internet sales are still relatively small compared to total retail sales. I think one thing that levels playing through that little bit particularly on big physical items is sales tax is now going to – it be required on internet sales so that’s one advantage that used to go to an internet sale that is no longer existing. Shipping cost obviously getting more expensive and it makes harder to ship big bulky items. So, some of the cost advantages are decreasing that increasing for internet sales. And I think it’s something that we’ve been working through for years now and I think it’s much less of a threat today than it was in 2000 when the cover of Time Magazine had a picture of mall instead our malls did and it quite the opposite malls are significantly stronger today than they were in 2000.

Unidentified Analyst

Can you give us a little bit more color on funding source of all this external growth for the coming years because in this market where there is more concerns about higher interest rates, lower share price.

Tom O’Hern

I’m sorry. I missed the first part of that question.

Unidentified Analyst

How do you fund the let’s say the future developments and future acquisition in a raising cost of capital event?

Tom O’Hern

Okay, good question. Well, from our standpoint we’ve been higher capital environments many times in the last 20 years that we’ve been public. And over that 20 year period, we’ve had some great acquisitions. For us it’s not about a positive spread day one on the acquisition I mean you guys looked at Queens Plaza and Green Acres and yes we do have a nice positive spread day one because of the low cost of debt. But, for us it’s really finding assets where there is good growth in the assets either in place rents that are significantly lower than market, the ability to expand it, renovate it and change it, create NAV drive value. So, for us we’re not a sensitive positive spread investor like a lot of others maybe particularly outside of the mall sector. So, we’re not as interest rate sensitive on the disposition side of the equation as we are continuing to keep an open mind disposing on core assets.

The real critical thing for the companies that we’ve been working with is not so much that they get a 3.5% interest rate versus the 4.5%. What’s more important to them is that they can take the leverage up to 70% to 80% that’s really the critical thing there. So, as long as that exist I think we’ll be able to do dispositions. If that – if the debt markets were to change along with raising interest rates, that may slow down but again that’s not the end of the world for us for an opportunistic seller there is going to be times when it makes sense and times when it doesn’t. But on the acquisition front, I don’t think if we see interest rates rise a bit it’s going to change our view of things dramatically.

Unidentified Analyst

If you actually start to see cap rates move at all, given the raising rates over the last three months?

Tom O’Hern

Well, the reality is in the A quality space there is not a lot of available assets. So, you’re not no matter whether rates are going up or down, we don’t see a lot of cap rate movement there. If a good asset comes up it’s going to be in demand.

Unidentified Analyst

Yeah.

Tom O’Hern

There is going to be a low cap rate.

Unidentified Analyst

How about on the sort of the B and C level staff I mean what do you have?

Tom O’Hern

We still see demand, we’ve sold the number of assets. We still think there is interest out there and I have not seen cap rates move significantly. Again, I think it’s more important for those financial buyers who are looking for a leverage return to be able to get high leverage and that’s much more important than a 4% coupon or a – versus the 4.5% coupon.

Unidentified Analyst

Right. Maybe sticking with some of this theme sort of external expansion, I guess your compact lines are roughly around the $0.5 billion now, shadow pipeline kind of like-to-like amount, curious I think about to size that pipeline in the context of your overall size of the company and what’s going to drive that going forward in the out years?

Tom O’Hern

Well, I mean we’ve always been a developer. So, we’re always looking for opportunities and when you say the current pipeline is 500 that’s just the three project I showed up there.

Unidentified Analyst

Right.

Tom O’Hern

Fashion Outlets of Chicago, Niagara and Tysons Corner. In addition, and we disclosed this on our supplemental recorder. We’ve got six other projects that could be fairly sizeable what we call the shadow pipeline just because on it’s schedule doesn’t mean it’s going to happen but these are projects we were pursuing or have entitlements, Broadway Plaza in Walnut Creek, California where we’ve got an ambition to expand that center significantly improve it, project likely in excess of $100 million. Estrella Falls which is in Western Phoenix market.

We have an entitlement there would be a regional mall that’s a $200 million project, it’s down the road a little bit 2016, 2017 but it’s definitely one we believe will happen. We’ve got capital allocated at Green Acres and Kings Plaza as we refine our thoughts on that. Los Cerritos Center, we’ve got redevelopment opportunity there where we put in a new (indiscernible) we’ve got their old space available, that’s a high demand center that does in excess of $600 of foot. So, that’s on the shadow pipeline. So, there is a number of things that we’re always working on that because obviously that’s a great way to drive NOI and NAV creation. These are known assets, known locations and typically we see an 8% plus return on development so that’s going to be accretive. So, that’s our bread and butter, we’re always going to be pushing that pipeline.

Unidentified Analyst

Great. And how do you think about kind of the outlet center business, is it more opportunistic in that context or?

Tom O’Hern

Well, we’re going to I mean today the outlets represent maybe 5% of our NOI, it’s going to be a small portion of our business and it’s going to only be in strong markets where similar to Chicago we’ve got a major metropolitan market there that was under represented by Fashion Outlets and we had a great location, great opportunity and we’ve built one which is 11% return and those are the kinds of things we’re looking for.

Unidentified Analyst

Right. Just looking at your – so you’re actually talked little bit about your geographic concentration. When I think about Macerich, historically you’ve done a very good job sort of growing the portfolio from your California West Coast routes did to the East Coast and so on to acquisition. How do you see that geographic spread developing over the next five to ten years or so?

Tom O’Hern

Well the biggest area that’s grown for us is been the Northeast I mean if you look at the slide I showed with the acquisitions recently, the bulk of that $1.7 billion was spent in the East and we’ve got some great centers there obviously that’s going to grow as we finish Tysons Corner. And I don’t think we necessarily target any one of those five regions, we would just say these are five major areas that we believe in and we think they’re going to grow at a better pace than the rest of the country and that’s the Northeast, Pacific Northwest combined with Northern California, Southern California. And then Phoenix, but actually our percentage of our NOI coning from Phoenix has reduced a little bit as we’ve increased the other areas, we still believe in Phoenix. And we saw a significant assets there but we like the Northeast, we like California.

Unidentified Analyst

Right.

Unidentified Analyst

Can you talk a little bit about the investors close to 300 debt-to-EBITDA and maybe now you probably bring leverage down and possibly there has been a lot of (Question Inaudible) time. But how you kind of manage those credit metrics to the extent that you want to bring leverage down, what have (Question Inaudible).

Tom O’Hern

Well, all of those actually but if you look at what we’ve done recently we did the acquisitions ahead of the delevering, so we did acquisitions in the fourth quarter last year, first quarter this year, this year we actively sold $533 million of non-core assets and that was used to delever. And in addition we issued some equity of the ATM which turned out to be the high point of the year at $71 a share that was more likely than anything, I’d like to take credit for that but it was then time to coincide with our inclusion in the S&P 500. And also as we grow same center EBITDA 4% plus a year, that’s going to also push that number down. So, we look at that in the 7s and it had just come down under 8 as a result of those delevering activities this year, we think that’s going to continue to go down. But with that we also looked at debt-to-value. We also looked at how much floating rate debt we have, debt maturities. We think it’s a combination of debt metrics not just that one.

Unidentified Analyst

You’ve been wanting to sell the next time of that.

Unidentified Analyst

Can you give us a little bit color on the dividend policy going forward which you haven’t broke for this payout ratio?

Tom O’Hern

Historically we…

Ross Smotrich - Barclays

Just repeat the question.

Tom O’Hern

I'm sorry. It was the question on dividend policy increases in payout ratio. Historically, if you look back over the last 20 years, we’ve increased the dividend every year but one. And typically it hasn’t been the full amount of the FFO growth but it’s been 3% to 4% range, few of us in management have a significant number of shares as it relates to our own network, we love the dividend and most of our shareholders love the dividend. Typically we address the dividend in terms of an increase once a quarter and that’s in the fourth quarter, so it’s coming up. And our goal is to increase it every year and will be by the full amount of the FFO growth but we think it will be significant and our goal is to make it a meaningful increase every year.

Ross Smotrich - Barclays

Sorry about them. Just a noise here behind the stage. Tom, thinking back to the beginning of the year you guys laid out kind of a strategy to drive same store NOI growth, little bit more macro. I guess it was rents merchandise mix in the A quality assets, occupancy in the B quality assets, some recycling which you clearly done some expense controls. Wondering how you’re thinking about that going forward and into 2014 kind of an update, what you always thinking about?

Tom O’Hern

Well, I mean we’re going to see the benefit in 2014 of the disposition of non-core assets this year. So, I think it is going to be a combination of the things I mentioned on the slide releasing spreads. We’re going to continue to push occupancy arguably at 94%, 95% that’s full occupancy but below that there is part of that that’s temporary tenants, tenants that occupy space for six months to a year, they are included in the occupancy statistic. Typically they don’t pay full rent. So, if we can convert a meaningful amount of that to permanent occupancy, that’s going to also help drive NOI growth.

Ross Smotrich - Barclays

Right, okay. And through this half of the year now look better I think than people thought without asking for guidance into 2014, some of those trends aren’t sustainable.

Tom O’Hern

I think they’re sustainable I mean we significantly control the expenses this year but we do that every year so that’s not an unusual activity for us, I think they’re releasing spreads. We’re typical this year, I think occupancy gains were a little bit better than we’d expected going to the year but there is still a significant opportunity for us to convert temporary tenants to permanent occupancy and I can see that going forward into 2014.

Ross Smotrich - Barclays

Great. So, let me ask you a typical analyst question, right. It sounds like things in the mall business are pretty good. You’ve got pretty strong internal growth, pretty good redevelopment opportunities, pretty accommodating capital markets. What do you worry about?

Tom O’Hern

Well, I mean obviously because, John I go spend a lot of time with investors. We always worry when the share price is down or not performing on par with the S&P 500 for example. So, even though our operating metrics are great the capital market is been very good to us, we’ve been able to execute on our strategy of dispositions stocks flat for the year, is that keeping you up in nice answer, it does.

Ross Smotrich - Barclays

Yeah, okay. Doesn’t make you feel any better but you’re not alone in the REIT space.

Tom O’Hern

I realize that. Thank you. It does make me feel better.

Ross Smotrich - Barclays

No, it doesn’t. Very good. Any other, we have another minute or so. Yes.

Unidentified Analyst

(Question Inaudible)

Tom O’Hern

No, I don’t think anybody, I think I’d characterize even the activities of the mall companies is being opportunistic. And if you look at these assets in our case it’s less than 15% of our NOI, it may not be growing at 4% to 5% same center growth, it maybe growing at 1% but it’s such a small percentage of our NOI that we’re not going to sell anything that doesn’t make sense in terms of pricing. So, we’re opportunistic, I think others in this sector or two. And I think there is still – if you make a few assumptions even in acquisition at 7.5 cap rate today it’s pretty easy for them to get financing at under 5% at leverage level 70% or so. So, they’re still going to see a 10% plus return on equity day one. And lot of the buyers at the B centers are they’re leverage buyers, they’re looking at for the IRR and they think can fill some occupancy and those with the backend cap rate assumption as but I don’t see that changing too much but I don’t think you’re going to see the public companies reach to dispose of things in a hurry. I think it’s going to be rational and it’s going to be opportunistic.

Ross Smotrich - Barclays

Great. So, we’re pretty much out of time at this point. There is a breakout session, if you have further questions it’s over in the Bryant Sweet. So, I’d like to thank both Tom and John for joining us from Macerich. And appreciated very much.

Tom O’Hern

Well, thank you Ross. And thanks everybody for joining us today.

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Source: The Macerich's Management Presents at Barclays Capital Global Financials Conference (Transcript)
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