Macerich's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Oct.29.13 | About: Macerich Co. (MAC)

Macerich Co. (NYSE:MAC)

Q3 2013 Earnings Conference Call

October 29, 2013 11:00 PM ET

Executives

Jean Wood – Vice President of Investor Relations

Arthur M. Coppola – Chairman and Chief Executive Officer

Tom O’Hern – Senior Executive Vice President, Chief Financial Officer and Treasurer

Robert D. Perlmutter – Executive Vice President-Leasing

Analysts

Craig Schmidt – Bank of America Merrill Lynch

Michael Bilerman – Citigroup Inc.

Richard Moore – RBC Capital Markets

Luke McCarthy – Deutsche Bank

Daniel Busch – Green Street Advisors

Haendel St. Juste – Morgan Stanley & Co. LLC

Alexander Goldfarb – Sandler O’Neill & Partners L.P.

Joshua Patinkin – BMO Capital Markets

Michael Mueller – JPMorgan Chase & Co.

Operator

Good day, everyone. Thank you for standing by. Welcome to the Macerich Company Third Quarter 2013 Earnings Call. As a reminder, 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.

Again, this call is being recorded and I would now like to turn the conference over to Ms. Jean Wood, Vice President of Investor Relations. Please go ahead Ma’am.

Jean Wood

Thank you, everyone for joining us on our third 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 Investors section of the Company’s website at www.macerich.com.

Joining us today are Art Coppola, CEO and Chairman of the Board of Directors; Tom O’Hern, Senior Executive Vice President and Chief Financial Officer; Bobby Perlmutter, Executive Vice President, Leasing; and John Perry, Senior Vice President, Investor Relations.

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

Thomas E. O’Hern

Thank you, Jean. Today, we will be keeping 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 run out of time and you are still in need of questions being answered, please do not hesitate to reach out for me, Art, John Perry or Jean Wood.

It was another great quarter. We continued to execute 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. Looking at our operating metrics, leasing volumes and spreads were both good. We signed 306,000 square feet of leases during the quarter with an average positive releasing spreads of 14.2% over the trailing 12-month period.

Mall occupancy was at 93.7%. That was up 90 basis points year-over-year. Also it’s very important to note when looking at the year-over-year occupancy gain that over the past four quarters, we’ve had about 250,000 square feet that had been converted from temporary tenant occupancy to permanent leases. The average rent differential between a permanent lease and a temporary lease is between $20 and $25 per square foot. Currently we have 5.6% of our occupancy which comes from tenants we consider temporary.

We will continue to focus on converting those tenants to permanent occupancy in the near future. In terms of FFO for the quarter it was up 10% at $0.86 per share compared to $0.78 a year ago, included in that was same-center NOI of 3.5% compared to the third quarter of last year. That increase was driven by increased occupancy, positive releasing spreads and annual CPI increases.

Year-to-date same-center NOI was up 3.83% and our guidance for the year remains at 3.75% to 4.25% and just to remind you that’s up a 100 basis points from our initial guidance for this year. Included in FFO for the quarter was a $1.4 million gain on early extinguishment of debt. The results of significant interest expense savings during the quarter as our average interest rate is down to 4.22% compared to 4.88% in the third quarter of last year. That’s also evidenced by our 2.9 times interest coverage ratio for the quarter.

Our balance sheet we have again made significant progress our debt-to-market cap at the end of the quarter was 42% and our floating-rate debt has been reduced to 12.7%. That’s about half of what it was year ago. Our average debt maturity duration has increased to six years, that’s up from 4.2 years at September 30 of 2012.

We recently committed to a $268 million life insurance company financing on the currently unencumbered FlatIron Crossing mall. That’s a seven year fixed-rate transaction with a rate of 3.85% that loan is expected to close in November and the loan proceeds will be used primarily to pay down floating-rate debt. So that will reduce our floating rate debt to under 10% of our total debt, and it will also stretch out our maturity schedule.

At September 30 the Company’s debt to EBITDA was 7.75 times, that’s down from 8.25 at the beginning of the year. We also have relatively light interest rate sensitivity if you look at the maturities coming up in 2014, 2015 and 2016. We’ve only got a $119 million of debt maturing in 2014 at an average rate of 4.1%.

We’ve got $640 million maturing in 2015 with a high coupon rate of 5.5% in 2016. We’ve got $525 million maturing with an average interest rate of 5.8%, so we’ve got lot of room from where we are today to those rates and we would expect that we would have very little, if any, negative impact from interest rate increases.

Also, as I mentioned after the FlatIron financing transaction, our floating rate debt will only represent about 8% of our total debt. In our press release this morning, we updated our FFO guidance. We increased the midpoint of our previously issued 2013 FFO per share diluted guidance range by $0.06, the new range is $3.46 to $3.52. The revised guidance range includes the actual dilutive impact of $0.18 per share relating to the disposition of seven non-core assets as well as selling $171 million worth of equity in May. Our initial guidance only called for range of $0.07 to $0.14 of dilution from those capital transactions.

The increase in the guidance results from the third quarter beat and the balance is primarily driven by strong operations that we’ve seen throughout the year. On October 24 we increased our quarterly dividend per share by 6.9%, it’s now $0.62 per share per quarter. This increased dividend represents a 4.2% annual dividend yield based on today’s price.

Looking at tenant sales portfolio, mall tenant sales per square foot were up 7.4% to $549 a foot for the trailing 12 months compared to $511 for the trailing 12 months ended September 30, 2012. The impact of the assets that we sold on that number was $10 per foot, so the sales growth excluding the impact of those assets would have been approximately 5.4%.

Now, I’d like to turn it over to Art.

Arthur M. Coppola

Thank you, Tom and welcome to our call. I would like to touch upon a few topics that have been very much talked about in the last couple of months with regard to regional mall landlords, and that relates to releasing spreads and moderating sales increases from tenants and its impact on same-center NOI. I also want to discuss a little bit the portfolio management activities that we have had including recently announced dispositions, our balance sheet and then finally our development pipeline and then open it up to questions.

It’s clear that tenant sales have moderated over the past year, but releasing spreads today remain extremely strong. Tenants in our malls are making a lot of money. They are doing great sales productivity and there is extremely high demand. Laws of supply and demand work heavily in our favor, and if you look at the portfolio that we own, virtually all of the malls that we own are – at least 85% of the malls that we own are must-have malls.

So, when it comes time for a tenant to renew, it’s not a matter of how much rent we’re going to get, it’s really a matter of just coming to the proper number and then moving forward. Many times we find tenants in centers like Queens Center where they are paying us already 40% some of sales and we tell them look it’s probably time for you to move on, if you don’t, your rents are going to have to go up to a certain number. They elect to stay, because when you are in must have trophy centers like Queen’s, Tysons, Santa Monica and many others that we own. The tenants cannot afford to lose these spaces as part of their brand.

Anecdotally if you look back to the Great Depression of all of 2008 to the end of the third quarter of 2009. Tenant sales in our portfolio dropped 15% to 16% it was a disaster. But even in that environment because we were sitting on sales increases from 2004 through 2008 that had not been mined yet. We had releasing spreads of 14% in the year 2009.

If you look at our centers spreads are better or higher in our best centers. Our top 10 centers year-to-date had leasing spreads of a little over 30%. The next group of 20 centers have leasing spreads of just under 10% and the balance of the portfolio had leasing spreads of around 5% for an average of 14.2%, which all makes sense.

Regionally we had leasing spreads in Arizona of 12.5% year-to-date, in our central regions 7.8%, in the Eastern region 30% spreads, Northern California and Pacific Northwest 6% and Southern California 13%.

Our outlook for leasing remains extremely strong. If you look at our top 40 centers the sales in that group of centers averaged just over $606 a square foot and I’ll remind you as you think about sales, that we’re one of the only top tier Wall street companies that disclose sales on a center by center basis over the last five years.

So any confusion you may have about sales and productivity obviously can be answered by looking at that. 85% of our NOI comes from our top 40 centers, they average $606 a foot. Cost of occupancy in those centers is about 13.3%.It would not at all be out of the question if you would ask me how much embedded sales growth we have in those centers to tell you we easily have 20% mark-to-market in those centers, and that’s without any future sales increases. So we remain extremely positive about our outlook on leasing spreads.

Moving to same-center NOI, I’m very pleased to remind you that at the beginning of the year we gave you guidance that our same-center NOI would be in the range of 0.50% and 0.75% to 3.25%. We upgraded our guidance during the course of the year to 3.75% to 4.25%. Part of the thing that helped to drive that number is our efforts this year to put more focus on the conversion of temps to perms, and that certainly helped to drive our same-center NOI growth.

The guidance levels that we’re at right now, 3.75% to 4.25%, those are very strong numbers. Very few sectors are able to put up those kind of numbers year-in and year-out, and again, we have a very, very bright outlook for the future here. Same-center NOI obviously is a function of many things. In our portfolio, a big piece of our same-center NOI is the fact that 70% of our leases are tied to a multiple of the cost of living increase. So we automatically every January get a bump of 1.5% to 2% depending on the inflation rate.

Leasing spreads obviously have an impact on same-center NOI and we’ve been able to put up strong leasing spreads historically even in the toughest of times and we see strong spreads going forward. Probably the big number that would influence same-center NOI from one portfolio to another is occupancy, and I’ll be the first to tell you that we are very stingy in terms of the rent that we get. We’re very frugal in terms of the tenant allowances that we give and we demand high rents, and at times that means that we do not get rent increases as fast or we suffer turnover in our centers as we are replacing low productivity tenants with high productivity tenants.

I took a look at centers like Queens and Tysons and Broadway Plaza and North Bridge, and we don’t include any of those centers in our redevelopment or development non same-center pipeline, and yet each of them are going through major releasing or are the subject of a major redevelopment that’s going on. Queens has had substantial lease turnover.

And when you have frictional vacancy in a center like Queens and you are going from a tenant that is paying $1.5 million of rent to a new kind of tenant that’s paying $3.5 million of rent, and that obviously has a big impact in your same-center NOI. If we’re chasing same-center NOI, we wanted to take a short-term solution and not do the right thing for the real estate then we could put up better numbers in centers like that. But that’s the wrong thing to do when you have those opportunities.

My guess is between those four centers and a couple of others of that nature that we do not exclude from our same-center NOI, even though we know at centers like Tysons where we’re readying the center for the introduction of the new Plaza – Broadway Plaza where we’re de-leasing the center in preparation for its demolition. North Bridge where we’ve had substantial recycling, my guess is, is that our same-center NOI has been impacted by 50 basis points to 75 basis points just from holding space off or de-leasing space or frictional vacancy in centers of that nature.

Looking to portfolio management, I think that we are very happy with what we’ve accomplished over the last year. It doesn’t come without a price to earnings. Obviously at the beginning of the year as Tom mentioned we gave you guidance that we forecast $0.07 to $0.14 a share in dilution from disposition. In fact that number is going to be about $0.18 a share. So even though we currently are sitting on FFO growth for this year after all of that dilution of 11%, had we not elected to go through the culling that we went through and to reload our balance sheet for the future, we would’ve had FFO growth this year of 17% to 18%.

As I think about the portfolio management that we’ve accomplished I can look at it either one or two ways. I can look at it and say we essentially paid for the $1.7 billion of real estate that we bought in Kings Plaza, Green Acres, buying the 33% interest in Arrowhead and the 75% interest back in FlatIron in the fall of last year.

We either paid for that with our dispositions or we have essentially pre-funded our $1 billion development pipeline through our dispositions. Between dispositions, and the equity raise that we have this year we have delevered the company by a little over $1.1 billion.

During the quarter or at the end of the quarter there was an announcement that two centers are under contract with one of our peers and a couple of analysts have guessed that those two centers are Chesterfield and Salisbury. Those are pretty good guesses, and we would anticipate that, that transaction and the ordinary course of business after it flows through the rating agencies, because both of them have CMBS debt to close later on this year.

Looking to our balance sheet. It amazes me that investors over the last 18 months have forgotten 2008 and 2009 especially as we’re moving into a period of tremendous financial uncertainty with government shutdowns and slowing retail sales. It gives me great comfort that when we said to you about two or three years ago that we were going to completely transform both the left side and the right side of our balance sheet that we have substantially strengthened our asset base, both through the addition of great new assets, the construction of great new assets, as well as some selective dispositions.

But we also have tremendously strengthened our balance sheet. Just this year alone we have delivered our Company by another $1 billion through our disposition and the equity raise. So, we are extremely pleased with where we find ourselves here. Tom took a look for you at our maturities over the next three years. Again, I would remind you, take a close look at how much we have lengthened our maturity schedule. Tremendous amount of our maturities are now in the 2020, 2021, 2022 and beyond, but even looking at the next three years, our pro rata – the debt that we have maturing over the next three years is about $1.6 billion.

Treasuries could go to at least 3.75%, maybe even 4%, and we’re not going to go backwards in terms of the interest rate that we pay on that debt. Looking at those maturities, in a different way, our estimate is based upon current underwriting standards that those $1.6 billion of maturities could easily generate $800 million to $900 million of excess refinancing proceeds, which we would then use to go ahead and you could think of that as another source of self-funding our $1 billion development and redevelopment pipeline.

Speaking of which, Fashion Outlets of Chicago, obviously, opened up to a tremendous reception. Sales at the center are doing terrific. Traffic is outstanding. We are getting incredible reports from all of the retailers. Virtually every retailer talks about it being it’s one of their best openings if not their best opening ever.

We’ve had great contributors from tenants such as Coach and Gucci and Kors and Prada and Tory Burch and True Religion. Our anchorage, Forever 21, Bloomingdale, Saks’s Off 5th, Neiman Marcus. Last Call, they are doing all terrific. We have great new tenants coming in the fourth quarter with Diane von Furstenberg, montelair, Trina Turk and Zegna and Burberry and metro coming in the spring of next year.

Based upon current sales estimates, we’ve moved fashion outlets of Chicago in terms of our estimated sales rankings to just in the ballpark of our top 10. We’ve actually got it ranked at number 11. You’ll see in our supplement. We don’t know what the sales are going to be obviously and we have sales results for two months, but two months cannot forecast what the first year or two is going to be. But I can tell you the traffic continues to be terrific.

The tourists are beginning to find us. We’ve had over 50% of our foreign shoppers are from China, which makes sense, and we see tremendous upside from this center. We see opportunities for some nice surprises on percentage rents which actually is part of the reason for the breadth in range for the fourth quarter, because we won’t know until we see those sales.

My current guesstimate is that if the sales levels that we would expect this center to be at, that we’re currently sitting at a cost of occupancy at this center, even though we got strong rents going into it under 10%. So, as tenants rollover and in terrific centers you do have rollover, we find that in the great centers that when they open great the unproductive, tenants are exposed and great new tenants that see the opportunity are there to replace them with that kind of cost of occupancy that we see it’s currently being under 10% at this center. We would see great opportunity for growth as we have an opportunity to continue to lease up the balance of the space as well as in the years to come to book percentage rents and the natural roll over that we’ll have.

Moving to Tysons Corner that project will be coming online next year, it’s on-time, on-budget the office leasing is up to just under 70%, we expect to open the office well over 90% committed.

As I mentioned the retail center is having tremendous benefits in terms of interest from tenants. We’ve got flagship tenants that Bobby may allude to later that have committed to come and occupy retail space at Tyson but part of the price of making that space available it is the vacancy or frictional vacancy that you suffer to create that opportunity for them.

We had announced in previous calls that we see an all in going in cash on cash returns on the densification investment of something over 8%. And that doesn’t include any uplift in the retail rents which we believe will be substantial over time.

In looking at our supplement Fashion Outlets of Niagara. We are now getting ready to break ground we’re 70% leased, we’ve got in our supplement $75 million of cost with a 9% incremental return. There is also substantial releasing of the existing mall at Fashion Outlets of Niagara that’s taking place as we are moving tenants from the existing mall into the expansion mall and then backfilling with new tenants.

If I were to include the increment that we are going to pick up in the existing mall as part of the expansion which would not be an abnormal way of looking at it and then I would see an all-in return on this expansion investment of 15%.

Looking at North Bridge it’s been announced in the press that Eataly as well as a couple of great new restaurants are going to be opening up in late November. We see that as being something that is going to drive tremendous traffic to the South Michigan corridor, which is anchored by the number one Nordstrom in the world at North Bridge Mall.

In our supplement you see a couple of new projects mentioned. We finally have gotten a wink and a nod that appears that we are going to able to get approvals to add a new movie theater to the 50,000 square feet of space that we’ve been warehousing on the third level of Santa Monica Place that will generate tremendous traffic to the third level. There are no first class movie theaters West of the 405 or certainly in Santa Monica. This is going to drive at least 2,500 to 3,000 people a day.

Add to that the new metro link, the new Rapid Transit Rail System that opens up in two years across the street from Santa Monica Place, which will coincide with the new theater opening and the future there is very bright.

At Scottsdale Fashion Square, we’re adding a new anchor complex, which is a combination of a major new theater as well as the Dick’s Sporting Goods and we think that that’s just the natural extension to a great regional mall of that nature.

The highlight of our redevelopment pipeline is Broadway Plaza. Just last week we finally got approval from the Core of Engineers for the vacation of an easement, which was necessary for the drainage easement that was necessary in order to enable us to move forward with the demolition of this center and building a brand new mall in this location.

If you think about what we’re doing at Broadway Plaza, it’s not that different than what we did at Santa Monica Place five years ago. At Santa Monica Place five years ago, we completely shut down the mall there. The only difference between what we are doing at Broadway Plaza and Santa Monica Place is that we’re not shutting down the anchors and we’re not shutting down the entire mall. But we are going to be tearing down about 175,000 square feet of space.

Currently one of the weaknesses of Broadway Plaza is that we just don’t have enough specialty space for the retail tenant. We only have about 100,000 square feet of specialty space available for the retail tenant.

So, upon completion of this expansion which involves the demolition of all of the retail space between Nordstrom which is one of the top 10 Nordstroms in the United States and Macy’s which is one of the top 20 Macy’s in the United States. We’ll be tearing down all of the specialty stores between those two department stores most likely next year.

My guess is that in the next supplement this project will move up to the green light category and then it will be opening up in phases and in late 2015 and early 2016 with the final phase being in 2017. We see an incremental investment of $250 million with an incremental return of 8% to 9%.

When we think about these incremental returns, we take the current net operating income that we have today and that we say, okay, we have to earn a return on investment that is in excess of that earned income. So, today we have let’s say for example $15 million of NOI coming from Broadway Plaza, if we’re going to spend $250 million on new investment and we hope to see at least an 8% incremental return, then we have to see at least a $20 million incremental return as well as replace the $15 million that was there in the beginning.

The center is going to be an unbelievable powerhouse, with a brand new mall. I would tell you it’s the most exciting location to be built in the United States. Walnut Creek is one of the most sought after locations in the entire West Coast and it’s certainly one of the three must have locations in the Bay Area.

Add to that a top Nordstrom, a brand new Neiman Marcus and a strong Macy’s store and a proven track record for this center (which opened in 1951) for over 60 years, there is probably no other redevelopment or expansion opportunities like this. We are essentially building a brand new mall in the middle of an incredible trade area.

With that I’d like to open it up to questions, operator.

Question-and-Answer Session

Operator

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

Arthur M. Coppola

Hi Craig.

Craig Schmidt – Bank of America Merrill Lynch

Hi how are you? Art I was wondering if you could spend a little time and talk about how the redevelopment efforts at Kings Plaza and Green Acres are going to differ?

Arthur M. Coppola

Sure the initial development efforts at Green Acres currently we’re primarily looking at building a series of tower center type tenants as well as entertainment type tenants on the 20 acres of land that we bought next door to Green Acres.

We’re also doing a tremendous amount of leasing at Green Acres which maybe Bobby you may want to touch upon. And long-term obviously we’ll be looking at the future of our department stores that are there, one of which would love to expand but obviously they need to get their act together before they can think of such a thing.

So right now tremendous amount of releasing is beginning to happen inside the mall at Green Acres and then we’re looking at adding new retail space which we’re getting tremendous rents from a lot of the bigger box type users on the 20 acres of land that we bought there. At Kings Bob would you like to comment on kind of what the merchandising plan is in focuses on Kings Plaza?

Robert Perlmutter

Sure Craig this is Bob Perlmutter. I would describe Kings as having two opportunities. The first one sits within the existing small store set. We believe we have the opportunity over the next couple of years to really make Kings much closer to Queens, in terms of physical improvements, in terms of merchandise mix, in terms of the way it’s operated and marketed and ultimately in terms of sales. And as we’ve discussed, if we can get the sales at Kings to a closer level to Queens, there will be significant rent growth over the coming years.

The longer term piece is the potential redevelopment of the Sears box which affords us approximately 300,000 feet of space that we believe over a longer period of time it maybe carved up into both specialty stores and restaurants as well as some box tenants. So there is opportunity within the existing mall stores and then there is the potential to redevelop one in the existing anchors.

Craig Schmidt – Bank of America Merrill Lynch

Great. And then just on Paradise Valley, I noticed that you’ve taken away the projected cost. Are you thinking of enlarging that redevelopment or scaling it down?

Arthur M. Coppola

Scaling it down. There’s uncertainty in terms of getting approvals from certain anchored apartment stores that have put a little bit more into a reconsideration category, which was a new development. So scaling it back.

Craig Schmidt – Bank of America Merrill Lynch

Thank you.

Operator

Next we will go to Michael Bilerman with Citi.

Michael Bilerman – Citigroup Inc.

Good morning. Tom, in your opening remarks you talked about temp to perm about 250,000 square feet over the last four quarters and currently about 560 basis points of temporary that I guess you would seek to eventually move over to permanent category that uplift of $20 to $25 of rent. So I’m just curious what’s the basis that you’re using in terms of square footage? I think it’s probably about 1 million square feet is that, but I wasn’t sure in terms of that 560 basis points. How much of that do you think you’re going to be able to convert the time to convert it and the capital that you need to put in to get the rents that you’re looking for?

Thomas E. O’Hern

Mike, I’ll take the first part of that and then I’ll defer it to Bobby. This is his team, is the team that’s really got to do it. The 5.6% is roughly 1.3 million square feet in total. The capital, it’s typically not a very capital intensive effort, at least to-date it has not been. So, the capital really isn’t a significant part of the equation. Bobby, you want to comment on timing?

Robert Perlmutter

Yes In terms of timing, I think we see a long-term stabilized temporary occupancy of 3% to 4%. One of the things to remember is, when we are able to convert the temporary to permanent, it’s not that we necessarily exit the temporary tenant out of the mall. We typically will maintain the temp in a lesser location. So, part of what’s occurring is the temp is being converted to permanent.

A full rent is being achieved, yet the permanent – the temporary tenant is often relocated to another part of the center. So, we’ll always have some degree of temporary tenants within the centers.

Michael Bilerman – Citigroup Inc.

So, I guess you are looking at total occupancy moving up in addition to the conversion. So, you sort of get a dual benefit from that?

Robert Perlmutter

Right. And I think roughly, we have over the last year about a 200 basis point increase in permanent occupancy.

Michael Bilerman – Citigroup Inc.

Okay. And then just on the disposition, I just want to make sure I get the change in sort of what you’re doing. Including the two assets to Rausch, you’ll have disposed of about $920 million gross of assets, is about $300 million of debt on those assets, so generating net equity of $622 million.

Originally, guidance was $500 million to $1 billion, about a third debt, so $650 million of proceeds, so sort of right smack in the middle from an equity perspective. So I am just curious how much of it was timing in terms of I guess now you are seeing $0.18 of dilution for the year and I guess how should we think about an annualized dilution impact from the sales activity.

How much was timing, how much was price just sort of what were the ins and outs relative to your original thought process on the sales?

Thomas E. O’Hern

Michael one point of clarification on the $0.18, $0.05 of that dilution came from the equity issuance in May that was not part of our initial guidance. So $0.13 related to the dispositions that have happened year-to-date, obviously if anything happens between now and year end is going to have a pretty short period of time in 2013, so we wouldn’t expect much impact there one way or another.

Arthur M. Coppola

As far as the timing of when that transaction materialized it was just the ordinary course of business. Look we are committed on an ongoing basis to pruning our portfolio and reinvesting proceeds from certain assets into our redevelopment pipeline and our top tier assets. That’s going to be ongoing. In August when we had our last call we had nothing in the works there was nothing under contract. So this really developed after August, it is what it is.

Michael Bilerman – Citigroup Inc.

Right, thank you.

Robert Perlmutter

Thanks.

Operator

(Operator Instructions) We will go next to Rich Moore with RBC Capital Markets.

Richard Moore – RBC Capital Markets

Hi good morning guys. While we are on the disposition topic, do you have anything else I guess currently in the hopper as we look at 2014, I mean I realize you’ll be opportunistic as these come along but is there anything you’re sort of actively pushing or engaging at this point?

Arthur M. Coppola

Our policy on acquisitions and dispositions is generally not to comment on individual transactions. But I’ll repeat that we’re committed on a long-term basis to recycling our capital and to constantly through portfolio management, which – that’s kind of the word I used for instead of dispositions today was portfolio management, through portfolio management to recycle out of certain what we consider to be non-core assets into our core assets to go for more assets to fewer bigger assets.

Look, I’ll go back to the assets that we’re selling. We didn’t dislike any of them. We liked them all, but it made sense for us to prudently recycle our capital and this market is allowing, the transaction market is allowing that activity to take place.

So, I’m sure that in our next call if there’s anything, you’re going to be in the works that would affect our 2014 guidance. We’ll do what we did for you in the January guidance call of this year. But at this point in time what’s under contract is that’s been disclosed is it, but long-term, we’re committed to culling our portfolio.

Richard Moore – RBC Capital Markets

In the appetite by buyers, is that changing in anyway? Would you say is it getting better or possibly worse I guess?

Arthur M. Coppola

I think that there are more buyers out there today than there were at the beginning of the year and I think the appetite of the specific buyer is higher today than it was at the beginning of the year.

Richard Moore – RBC Capital Markets

Okay good thank you and then Tom, on the recovery ratio, it’s staying – the expense recovery ratio, it’s staying what seems to be unusually high but it stayed that way now for a couple of quarters. So I am just curious, is this unusual and we’re going to head kind of back down a bit or should we keep the ratio up here?

Thomas E. O’Hern

No. I think this is what you’re going to see, Rich. I mean keep in mind that we have CPI increases built in not just for our minimum rents but also for fixed CAM charges. And oftentimes we have a better escalator on the CAM recoveries than we do on our minimum rents. In many cases it’s 2 times CPI. So that’s what helps charge the recovery rate and should help drive the gross margin as well.

Richard Moore – RBC Capital Markets

Okay good. Thank you, guys.

Arthur M. Coppola

Thanks Rich.

Thomas E. O’Hern

Thanks.

Operator

And next we will go to Luke McCarthy with Deutsche Bank.

Luke McCarthy – Deutsche Bank

Hey guys just I guess quickly on getting it out of the way. If you could just comment on JCPenney and kind of what you guys are hearing from them post back-to-school season as we head into holiday sales?

Arthur M. Coppola

Look they seem to be generating more traffic. We have exits or intercept interviews with their store managers which thankfully I think is a better source of information than you might get corporately. And the store managers are pleased with the new management team and they are optimistic about the future, beyond that I am the last person in the world that could prognosticate the future there other than, we are long term supporters of JCPenney as a brand and long term I think JCPenney is here to stay.

Luke McCarthy – Deutsche Bank

Sure, okay and then just one follow-up on redevelopment. There were some articles out there earlier in the year about you guys particularly responding well to your demographics I mean in California, in Phoenix with very culturally specific favorable attractions at the sites. Moving forward as you continue to focus on that effort, does that change from a cost perspective how you underwrite the deals or think about redevelopment moving forward?

Arthur M. Coppola

No, but it’s an interesting question. Look the lessons that we’ve learned in terms of focusing on our Vanguardia [ph] program. Is that you need to be in touch with your market whatever that market maybe. And that’s the thing that drove us three years ago to come up with the crazy idea of tearing down Broadway Plaza at Walnut Creek. Walnut Creek is not a spare, but the lessons that we learned of being in touch with your community. Being in touch with your demographic and realizing what your demographic ones it’s transferable across the board to all income groups and all ethnic groups. And Broadway Plaza as we looked at it we said look its great the anchors are great.

But there is so much demand for specialty space and the shoppers want so much more we are just not giving it to them basically we can’t give it to them unless we tear down roughly 60% of the center and 70% of the parking deck and rebuild the whole thing. And it was insane frankly in some peoples minds for us to think about it but as we look at it today.

I think it’s the best redevelopment opportunity to invest that kind of money to create a center that’s going to be worth, could be worth $1 billion. It’s an incredible opportunity and it’s only as a result of really just paying attention to your trade area and not being satisfied with something that’s good but we’re even great but always wanting it to be at its highest investor utilization.

That’s what drove us to do what we are doing at Walnut Creek that’s what drove us to do the densification at Tysons Corner. It was paying attention to the metro rail coming. Again, that was not a cultural thing, but paying attention to your trader and always striving to take your real estate to the highest investors.

Luke McCarthy – Deutsche Bank

Okay, great, thanks guys.

Arthur M. Coppola

Thanks Luke.

Operator

And next we’ll go to Daniel Busch with Green Street Advisors.

Daniel Busch – Green Street Advisors

When I look at the different mall groupings in the supplemental package, it looks like there’s quite a sizable gap between occupancy in the top 40 malls versus the ones outside the top 40, and I know Art, you mentioned that the retailer demand for space is quite strong. Is that demand, is it tend to drive pretty quickly, when you get outside of your top 40 malls? I guess, I’m just trying to get a better sense of what the demand for space is at those lower productivity centers?

Arthur M. Coppola

I’ll let Bob answer that, but our actual numbers year-to-date are that, we’ve had pretty decent results in that group of 41 to 57. Bob, do you want to talk about it?

Robert Perlmutter

Yeah, I mean, I think the first point is, we have been able to generate positive leasing spreads, even in the lowest tier group. I think that the two differences are primarily the nature of your tenant changes a little bit, much of it is more local or regionalized tenant as opposed to a national tenant. We find that we’re successful in maintaining tenants at renewals, but again, the nature of the tenancy is a little bit different and probably our biggest opportunities are less on leasing spreads and more on improving long-term occupancy.

Daniel Busch – Green Street Advisors

Okay. Just one other question, just looking at the portfolio makeup, I know, obviously you’ve been pretty active disposing of the assets, I guess, on the lower tier of the portfolio, but I know you’ve mentioned in the past that you want to focus on those markets where you have exposure or a great presence in and there are a couple of assets I guess where – I am thinking of you have one less than Texas that’s above – in the top 40. Are those malls where you don’t really have a presence in the market? Are those potential assets that you may look to dispose over the long-term?

Arthur M. Coppola

No, not that one in particular; look it’s a national business and maybe I’ve been a little too restraining when I said, look we want to focus on six or seven major markets. That’s not to the exclusion of everything else. So we’re not going to focus on only six or seven gateway cities. If a center is a must have center and we still see great upside in it, which the one in Bobby we do. Then it fits our profile.

Daniel Busch – Green Street Advisors

Okay, great. Thank you.

Arthur M. Coppola

We picked up that something down the road, possibly.

Daniel Busch – Green Street Advisors

Okay, thanks.

Arthur M. Coppola

Thanks.

Operator

Next we’ll go to Haendel St. Juste with Morgan Stanley.

Arthur M. Coppola

Hello.

Haendel St. Juste – Morgan Stanley & Co. LLC

Hey, a couple of quick questions for you. If I heard you right early on the call you said there is a 20% mark-to-market on your top 40 malls, even if sales stay flat. So I guess two questions, did I hear that right? And then could you provide the comparable number for your bottom tier malls?

Arthur M. Coppola

Yeah, you heard it right. That said, I did say that as I look at it that if you were – I’m asked constantly what’s your mark-to-market and I took a look at the top 40 centers we have, which generates 85% of our NOI. It’s not hard for me to see at least 20% mark-to-market there and that’s without pushing the envelope at all. That’s really very easy to see.

The opportunity I think as we move below those centers, which are number 41 through 57, which are roughly 12% to 15% of our NOI. The real opportunity there, I think is more occupancy gain than it is rent spread, and there is opportunities to do that. So but look, what drives this ship here is the top 40 centers and those are the flagships that we own and where really we see the huge upside in. But I’d say occupancy in the lower tier and rent uplift in the upper tier.

Haendel St. Juste – Morgan Stanley & Co. LLC

Okay, thank you for that. One more or I guess maybe one and half more. Just wanted to clarify the two malls sold week or so back, it sounds like they were not part of the broader disposition package contemplated earlier this year. Is that right?

Arthur M. Coppola

Which two are we talking about?

Haendel St. Juste – Morgan Stanley & Co. LLC

That would Chesterfield and Salisbury?

Arthur M. Coppola

They were part of a group of properties that we had a broker exposing to the market earlier this year, they were…

Haendel St. Juste – Morgan Stanley & Co. LLC

I guess…

Arthur M. Coppola

That by the way is not that relevant, because again I’ll remind you that the fact that we gave a certain number of assets to the broker earlier this year to the intermediary. I had no estimation or contemplation that all 14 of those assets would be sold. We didn’t want to speak for the buyers. We said look, these are some assets that fit the profile that we’ve owned them a long time.

We have a low basis in them. We’re able to do a reverse 1031 tax exchange to increase the basis in these assets to make it possible for us to think about selling them, and that’s what we did. We didn’t pull the market as to what people were interested in or what frankly we were interested in necessarily disposing it, other than the fact that they did fit the profile. They were not in our major markets. But they were part of a group of assets that were exposed earlier in the year.

Haendel St. Juste – Morgan Stanley & Co. LLC

Okay, okay. And in the fact of I guess Rouse. It’s a fairly known Rouse, I think about those assets, in fact that they emerged as the winning bidder. Is there something there perhaps a lack of a private equity bid? We’ve obviously seen them the private equity guys very active acquiring quite a few malls this year.

Is there something there that perhaps turned them off, maybe Rouse is perhaps the more strategic, a better buyer given perhaps operating of strategic synergies or some other factor? Just kind of curious as to with risk of putting words in the mouth of a public peer as to Rouse emerging as the winning bidder over the private equity who you would think could and should pay a higher price.

Arthur M. Coppola

I wouldn’t want to do that. We’re pleased to be able to transact with them. We are natural counter parties to each other and hopefully this is the first of several transactions that we can do with each other.

Haendel St. Juste – Morgan Stanley & Co. LLC

Appreciate it, thanks.

Arthur M. Coppola

Thank you.

Operator

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

Alexander Goldfarb – Sandler O’Neill & Partners L.P.

Hi, good morning Arthur.

Arthur M. Coppola

Good morning.

Alexander Goldfarb – Sandler O’Neill & Partners L.P.

First question is, Tom, if we look in the packet, the majority of the unencumbered assets are in the lower tier malls, which as you guys where in the portfolio, presumably those are malls that get sold as you guys have been discussing. Along those lines, because of the balance sheet discipline, should we think about the malls in the upper buckets, those becoming unencumbered, so that you do retain that unencumbered pool or how should we think about that?

Thomas E. O’Hern

No, I think we’re clearly have moved in the direction of long-term non-recourse financing. Once we closed on FlatIron, Alexander, there will no corporate debt outstanding. We’ve only got a little bit outstanding in line and in $125 million on secured term note. We will be completely secured borrowed at that point with $1.5 billion letter of credit available to us.

Then Art mentioned a little bit earlier, the maturities that we have coming due in 2014, 2015 and 2016, those are all for most part high quality assets that are unencumbered, I mean relatively lightly encumbered. And so we’ll be able to put some additional financing on those above and beyond what’s maturing. So we’re in good shape and I would not expect to see us unencumbering a lot of assets in the top 30 or 40.

Alexander Goldfarb – Sandler O’Neill & Partners L.P.

Okay. So previously where you guys had talked about your unencumbered asset pool that was more of a temporary nature, not something philosophical that the Company was seeking to maintain them?

Thomas E. O’Hern

That’s correct. I mean if you think about the period of time we’ve been in the last three years or so, we’ve been in a generation low of interest rates. And if you are going to be a non-recourse long-term fixed rate borrower, in the last 25 years, there has not been a better time to do so. And so we took advantage of the market conditions and we put some attractive financing on some of those previously unencumbered assets, the most recent of which will be FlatIron Crossings.

And you can look at the metrics on our balance sheet. Our floating rate debt is lower than it’s been in many, many years. Our coverage ratios are better than they’ve been, debt-to-EBITDA is rapidly approaching 7.5 times or lower and our maturity schedule has never looked as good as it has now. So that kind of speaks to the strategy in what we’ve done.

Alexander Goldfarb – Sandler O’Neill & Partners L.P.

Okay. It just seems then based on prior calls that you guys were looking to maintain an unencumbered pool, so just a little surprise that that was more just a reflection of a certain time period rather than a go-forward?

Thomas E. O’Hern

If you look at that period of time you will also see we probably had significant amounts outstanding on our line of credit. We had some other corporate debt. So today we have virtually no corporate debt.

Alexander Goldfarb – Sandler O’Neill & Partners L.P.

Okay.

Arthur M. Coppola

Without completely forecasting what we were doing, we also knew that the assets that were unencumbered were assets that potentially would be disposition candidates in the future. And we knew that certainly the private equity buyers are much more attracted to being able to put their own debt on these assets when they buy them, so that it makes them more saleable.

As of today, I think we also brought that up really just to point out our capacity, our firepower. It wasn’t intended to be a signal that we were headed towards becoming a rated Company. We certainly have a balance sheet today directionally, but if we wanted to go that route over the next period of time, it could be done, but I’m not convinced it’s necessarily the right thing.

To me the most important fact about our balance sheet today is that we have virtually nothing outstanding on $2 billion line of credit and we closed the upcoming FlatIron financing. We’ve got substantial cash on the balance sheet. So we got a tremendous amount of capacity sitting here.

Alexander Goldfarb – Sandler O’Neill & Partners L.P.

Okay. And then on Superstition, you guys bought out the rest of your stake there, there is about $350 a foot. What are your thoughts for that? I mean obviously you guys bought in the rest of the stakes, so what are your thoughts for that mall?

Arthur M. Coppola

It was just a transaction that was negotiated with our partner JCPenney and at this point in time, we like the asset. It’s part of the group of assets there that we own. And we have actually had increases on the occupancy there, nothing in particular there shouldn’t be any great signals.

It was done with a partner. If I had to really look at it and dissect what we did, it’s not the type of property that we would buy, if we own nothing of it, but we already owned two-thirds of it buying the other one-third. When you’re investing $20 million of equity to do it was not exactly a big stretch for our capital.

And as I think about it from a portfolio management viewpoint, it gives us the ability to maybe take some of our C Malls and dispose of them without having a significant dilution from those activities. So it’s a little bit of a portfolio management decision.

There shouldn’t be any big signal there, other than we’re not buying $350 a foot centers on their own today. But going from 66% to 100%, it gives you complete control of the asset, which also gives us the ability to think about monetizing it in the future more easily, financing it in the future without having to talk to a partner. There’s not a lot to be read into it though.

Alexander Goldfarb – Sandler O’Neill & Partners L.P.

Okay. I didn’t know if there was future expansion or something of that sort, but it sounds like not. Listen, thank you.

Arthur M. Coppola

Okay. Thanks Alex.

Operator

Next we’ll go to Josh Patinkin with BMO Capital Markets.

Joshua Patinkin – BMO Capital Markets

Thank you. On the temp to permanent occupancy discussion, just wondering if there’s a way to characterize the space? Is it skewed to one anchor in the malls or is it just to spread out to characterize it generally?

Robert D. Perlmutter

No, you shouldn’t just view this as end zone or department store links. The spaces are really spread throughout the centers and spread throughout the quality of centers. Sometimes it’s, because we’re trying to accumulate blocks of space to bring in a larger retailer. Sometimes it is lesser locations. As the markets been improving, we’ve been able to get permanent deals on it.

Joshua Patinkin – BMO Capital Markets

Okay. So lot of times it’s your decision to hold this space right, the 50 yard line for a couple of years as you wait for better tenants?

Robert D. Perlmutter

Sometimes; sometimes it’s to fill timing that we need for these tenants. But the space is, as a general rule, you shouldn’t just view them as lesser spaces within the centers.

Joshua Patinkin – BMO Capital Markets

Okay. And then kind of tying that into the specialty leasing business, I’m curious how you see that going forward? What is it as a percentage of revenue today and where was it a year ago, where do you think it could go and just your general thoughts on it?

Thomas E. O’Hern

In terms of this you have specialty tenant leasing?

Joshua Patinkin – BMO Capital Markets

Yes, specialty leasing.

Thomas E. O’Hern

Yes, today we’re tracking an over $50 million a year. So it’s a solid contributor to NOI, in NOI growth. It’s a relatively mature category. When we first rolled this out we’ve seen double-digit increases per year, it stabilized a little bit, but obviously as we move up the quality scale adding Kings Plaza and Green Acres that’s going to help a little bit. For example, in the third quarter of last year, it was about $13 million, even this year it was about $13.9 million, so we’re still seeing growth there and I don’t see that changing. I don’t know if you do.

Robert D. Perlmutter

I would say one of the things we’ve been trying to do in the common area is really not only grow the income, but improve the quality, especially at the top tier centers. And so that’s been a big challenge of the mall teams and we’re also looking at non-traditional ways to generate revenue within the shopping centers. So I would almost describe it as a maturing and evolving business within the shopping centers.

Joshua Patinkin – BMO Capital Markets

Okay, thank you.

Arthur M. Coppola

Thank you.

Operator

And we’ll take our last question from Yasmine Kamaruddin with JPMorgan.

Michael Mueller – JPMorgan Chase & Co.

Hey, it’s actually, Mike Mueller.

Arthur M. Coppola

Hey, Mike.

Michael Mueller – JPMorgan Chase & Co.

Hey, two questions. First of all, I think you mentioned for Broadway, there was about 15 million of NOI. How do you see that phasing out and over what time period? It’s the first one.

Arthur M. Coppola

Well, I think that our budget, first of all that was by illustration, but that’s certainly a pretty good ballpark. We’ll diminish that by about 35% next year. So we’ll take it down to a low point of $9 or $10 and then we’ll grow it back up as we bring the space back on line. So they’ll be at least $5 million or $6 million of NOI will disappear next year.

Look, it’s a major project where you’re demolishing almost half of the center. You’ve taken well over half of the parking decks out of service and rebuilding them. There are a lot of people that would say that’s crazy to do that, but the value creation opportunities are huge and our team knows how to do this, because we take old centers are reposition them, that’s our expertise, that’s our core competency. And yeah, to answer your questions, 5 million or 6 million of the NOI will go down and we do have a partner there. So we have half of that.

Michael Mueller – JPMorgan Chase & Co.

Got it.

Arthur M. Coppola

And then we’ll rebuild it to a level that could easily be in the 35 million to 40 million of NOI. I’m not sure if I actually said it, but I mean I don’t think Broadway is even in our top 20 centers in terms of NOI today. But when we get done with it, it’ll probably be in our top 10, maybe even in our top five, who knows.

Michael Mueller – JPMorgan Chase & Co.

Got it, okay. And the other question was just given the success at Chicago. Does it change at all how you are looking at incremental outlet developments?

Arthur M. Coppola

Well, it certainly gave us a lot of strength in the marketplace in leasing Fashion Outlets of Niagara’s expansion. It made us really aggressive in terms of moving forward there on that. And beyond that, look it’s a very interesting business that we see ourselves being a player in as we’ve said before.

But again I’ll repeat it, we’re not going to own a lot of them, because we are going to have the same requirement for our outlet investments as we have for our full price investments, and that is that we want fewer, bigger, stronger assets. We want them to be dominant. We want them to be must have in their trade areas.

Michael Mueller – JPMorgan Chase & Co.

Got it. Okay, thanks.

Arthur M. Coppola

Thank you.

Operator

That’s all the time we have for questions today. So I’d like to turn it back over to our speakers for any additional remarks.

Arthur M. Coppola

Again, thank you very much for joining us and we look forward to seeing you in couple of weeks at NAREIT. Thank you very much.

Operator

And that does conclude today’s call. We thank everyone again for their participation.

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