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Title: Macerich's (NYSE:MAC) CEO Art Coppola on Q2 2014 Results - Earnings Call Transcript

Symbol: MAC

Call Start: 15:30

Call End: 16:23

The Macerich Company (MAC)

Q2 2014 Results Earnings Conference Call

July 24, 2014 03:30 PM ET

Executives

Jean Wood - VP of Investor Relations

Art Coppola - Chairman and CEO

Tom O’Hern - SEVP and Chief Financial Officer

Robert Perlmutter - EVP Leasing

Analysts

Christy McElroy - Citibank

Alexander Goldfarb - Sandler O’Neill

Craig Schmidt - Bank of America Merrill Lynch

DJ Busch - Green Street Advisors

Rich Moore - RBC Capital Markets

Paul Morgan - MLV

Michael Mueller - JP Morgan

Ki Bin Kim – Suntrust Robinson Humphrey Inc.

Ben Yang – Evercore Partners

Jeremy Metz - UBS

Vincent Chao - Deutsche Bank

Haendel St. Juste - Morgan Stanley

Todd Thomas - KeyBanc Capital Markets

Jim Sullivan - Cowen & Company

Linda Tsai - Barclays

Tayo Okusanya - Jefferies

Presentation

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to The Macerich Company Second Quarter 2014 Earnings Conference Call. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be given at that time for you to queue up for questions.

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

Jean Wood

Hi. Thank you everyone for joining us on our second quarter 2014 earnings call. During the course of this call, management will be making forward-looking statements, which are subject to uncertainties and risks 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.

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; Tom O’Hern, Senior Executive Vice President and Chief Financial Officer; and Robert Perlmutter, Executive Vice President, Leasing.

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

Tom O’Hern

Thank you, Jean. Consistent with past practice, we will be limiting this call to one hour. If we run out of time and you still have questions, please don't hesitate to call me or John Perry or Jean. It was another strong quarter we had very good operating performance. Looking at the leasing activity both volume and spreads were good. We signed 336,000 square feet of specialty tenant leases the average re-leasing spread on a trailing 12 months basis was a positive 18.1%.

The occupancy level rose to 95.4% that was up by 160 basis points over the portfolio average at June 30 of 2013 another strong gain for the quarter. Looking at occupancy on the same center basis the occupancy level was 95.4% compared to 94.8%, again a very healthy 60 basis point improvements there. In addition to the increased occupancy level overall we reduced our temporary occupancy down to 5.2% that compared to 6.1% at June 30 of 2013 it is also down from 5.8% reported at year end. It's an area we will continue to focus on converting temporary tenants to permanent occupancy and believe we can continue this trend. Average base rents are very close to $50 a foot, they increased to $49.14 a foot, that’s up 5.5% from a year ago.

Looking now at operating results for the quarter, FFO was $0.86 per share that compared to $0.87 a share in the quarter ended June 30, 2013. This exceeded our guidance range of $0.81 to $0.83 per share.

In the quarter, we had same-center NOI of 3.6% compared to the second quarter of ‘13, which was also a strong quarter for us. This increase was driven by increased occupancy, positive releasing spreads and annual CPI increases.

The gross margin for the quarter including JVs improved to 67.2%, up from 66.6% in second quarter of ‘13. Also keep in mind that the second quarter of ‘14 includes dilution from assets sales primarily assets sold in 2013 of about $0.05 per share.

Bad debt expense for the quarter was $2.5 million as compared to $2 million in the second quarter of last year. Over the past three years, we've averaged about a $1 million per quarter in bad debt expense. So this quarter was unusually high, most of it came from local tenants plus the impact of the Sbarro's bankruptcy.

During the quarter, we bought our partner out of a very small joint venture, it was a 50% interest in Cascade Mall and we bought them out for $15 million. This resulted in a recognizing the tax benefit for book purposes of $2.8 million during the quarter. This was largely in accommodation to our partner and this is a small non-core asset for us that we likely will consider selling in the future.

During the fourth quarter, the average interest rate was down slightly to 4.11% compared to 4.14% in the second quarter of last year. The balance sheet continues to be in great shape with debt to market cap at 39% and interest coverage ratio 3.2 times, debt to EBITDA on a forward basis of 7.2 times and average debt maturity of 5.4 years with low amount of floating rate down, only 12% of our total debt is floating. In addition the financing market remains very strong. We have one financing in process right now. We've raised a $115 million refinancing of Victor Valley mall. The new debt is fixed for 10 years at a rate of 150 basis points over the 10 year treasury. So where rates are today, we expect to lock in a rate close to 4% and this will close.

In the press release this morning where we affirmed our FFO guidance of 2014 in the range of $3.50 to $3.60 we also confirmed our quarterly splits with 25% or so in the third quarter and the remainder 29% in the fourth quarter. There is a lot of moving pieces there, but we're still very comfortable with the range.

In terms of tenant sales, portfolio of mall tenant sales were up 4% to $567 for the year ended June 30, 2014 that compared to $545 for the portfolio during the period ended June 30, 2013. Taking a look at that stat on just the same center basis, sales per square foot $567 compared to $564 at June 30, 2013.

Further taking an additional look at it and including total sales that's for all tenants on same center basis which gives us the benefit of pick up in occupancy, this excludes anchor tenants but all other tenants. Our sales increased for the 12 months ended June 30, 2014 was 4.5%.

Arizona and Northern California continue to be top regions for us in terms of sales growth. And before I turn it over to Art I’d like to mention one last thing, we’ve just completed the Macerich sustainability report it’s on our website and there is a button on the front page of the website for it. We’ve been very active in this area and this report does a good job of summarizing our effort, I encourage you to take a look at that.

Art Coppola

Okay. Thanks Tom. As you can see more our earnings release as well as Tom’s comments our fundamentals remain fundamentally extremely strong. In fact, obviously our fundamentals are even stronger for us on a relative basis given the substantial pruning of our portfolio that we’ve done over the last 18 months. One of the most relevant numbers I think that Tom pointed out was the total center sales essentially in terms of the properties that we own today versus the property those same properties one year ago that those are up over 4% in the last year. And to us that is at least as important of a number as the comp sales number that we also report to you which is limited by two factors, one it’s tenants under 10,000 square feet and it’s two we have a protocol that the tenants have been in place I think for the full 12 months in order to be counted. But total sales that are generated from the retail campus we look at that as being a very relevant number and when we see the business that’s being generated from and it gets Tom's number was non-department store spaces that when we see that number going up it’s a sign that our properties are extremely healthy.

To the extent that even on a comp center basis sales have been flat and have held their own, look we would clearly like to see sales be up 5% or 6% but the fact to the matter is the sales are relatively flat for reasons that are pretty much beyond our control that have to do somewhat with the weather but also had to do with broader economic issues, it's look back again, that only 47% of the people employed in the United States have full time jobs and there are over 24 million people in United States workers that have either left the job or are looking for jobs or in voluntarily part time employee.

But we still saw never had a recovery from 2009, we still continue to model through, we say I believe is that changes overtime. But the fact that sales have been flat in our portfolio as well as others is long to maintaining sales that highly productive level of $580 a foot give or take and as long do you have must have real-estate and as long as the tenants really have no choice within your submarket or that you have the best choice within your submarket for them to take locations.

Then the demand for your space remains very strong and given, again the reality of no new supply in terms of comparable space, in terms of shopping mall space in United States that continues to drive our releasing spreads, which we have demonstrated through charts that we have shared with you and also just through looking at the quarterly results that we've given the double-digit in the releasing spreads over the last 10 years in good times and bad and we see that continuing for the foreseeable future.

We are very pleased in terms of where we expand from a portfolio view point or very pleased that have our dispositions largely behind us, we're pretty much out of the disposition business. From a guidance view point, we'll maintain our guidance to you that we will sell give or take on a net basis $250 million of assets for the year, we've sold the modest amount that's been sold to date we don't currency have anything under contract, we are talking on an opportunistic basis about one or two assets with the one or two groups we will see where that goes for and leaves the guidance untouched, net 250 million of dispositions waiting towards the fourth quarter of this year, but what we are very pleased about is to have completed our disposition program and to have that 1.5 billion that give or take in proceeds available to us to redeploy into our proven winters. And we are finally reaping the harvest. Tysons Corner is entering into a three day celebration today of the opening of our plaza at Tysons Corner with a big concert series starting tomorrow. We are celebrating the occupancy of the office building by Intelsat and we are celebrating the first writer of the silver line of riding at Tysons Corner at the Tysons substation on Saturday at 12 noon.

So that’s huge to see that finally happen. We are very much looking forward to continue on our progress on Broadway Plaza. In our supplement we decided to give you some rendering and also some photographs of before and after rendering of Broadway Plaza for example to give you a better idea of what we are doing there. So maybe after the call you can take note on page 36 of our supplement you will see a photograph of the center as it existed in April of this year, that area between Macy’s and Nordstrom on that photograph has now been demolished which you will see on page 37 and then you will see a rendering there on those pages also of where the new shops are going to be and that’s a very powerful expansion of a very powerful location of that we are very much looking forward to building out and opening up and phasing again starting next year.

Our Niagara project remains on time and on budget and we are also as we mentioned in the last call doing fairly significant add-ons to proven winners at Cerritos, Scottsdale Fashion Square in Santa Monica Place. Then you will see one project has dropped off of our supplement this quarter, which is the Estrella Falls in the West Valley and Phoenix and we dropped it off of the this supplement just because we like to have only on the supplement project that we think that may happen in the next three years. And currently we just don't see that for that new mall as something that we're going to want to deliver in the next three years. We think it's something that will happen over the next five years or seven years, it’s just not going to be in the next three years.

Phoenix has had a nice strong run in 2012 and through the middle of 2013 and continued to have decent employment growth. But the housing demand for new housing units has begun to flatten out a little bit. So, we're going to be a little bit cautious there, we own the land for not a huge investment and we'll be very judicious in terms of when we bring that new products online, there is no rush to bring it online, we're bringing online when it's ready to be brought.

In terms of other possibilities of projects that may find them their way other supplement, outside of our existing portfolio, we continue to work very selectively on some dominant high building entry urban locations for outlet centers and not fairly confident in the near future we will be able to announce the addition of one or two of those projects to our pipeline of opportunities.

With that, I'd like to open it up for questions and operator if you could take over from here, appreciated.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions). And we'll take our first question from Christy McElroy of Citibank.

Christy McElroy - Citibank

Hi good afternoon everyone.

Art Coppola

Hi Christy.

Christy McElroy - Citibank

When you guys reported results in, Q4 results in February your guidance at that point was $3.50 to $3.60 and I think that included $0.08 of dilution from $225 million to $275 million of sales that you had expected in the year. You feel $34 million at this point, it sounds like you still expect somewhere in that $250 million range but weighted towards the back end of the year.

I am wondering how much of dilution is embedded in that $3.50 to $3.60 today and what sort of offsetting that from a positive standpoint -- or from a negative standpoint, I am sorry?

Tom O’Hern

Well Christy a large part of the dilution were assets that we sold last year sold far more last year than our guidance for this year, and most of that was mid year and so rolling through. So first quarter for example had about $0.06 second quarter $0.05 and then it tapers down to about $0.03 or $0.04 a quarter in the last two. There is a lot of things in that guidance range, things like we certainly hadn't predicted the additional energy costs of the harsh winter I would cut the other way.

We've got two numbers that are, frankly their estimates based on history and that's bad debt expense and that's lease termination revenues. And obviously second quarter as I mentioned was active in terms of bad debt expense and wider than normal.

On the other hand we could see more leasing termination revenues coming in as a result of some things were in the mid stuff. So we're still very comfortable in that range, there is a lot of pieces do dilution, so one of it, yes there is little less dilution because of timing than we thought, but again vast majority of the dilution because of timing than we thought but again the vast majority of the dilution we had factored into the 2014 guidance was as a result of the 2013 dispositions, not the 2014.

Christy McElroy - Citibank

Okay. And just quickly what was the cap rate on the buy-in of Cascade?

Tom O’Hern

We generally don’t get into the cap rate conversation but I can say it was double-digit.

Christy McElroy - Citibank

Thank you, guys.

Operator

And we’ll take our next question from Alexander Goldfarb of Sandler O’Neill.

Alexander Goldfarb - Sandler O’Neill

Good afternoon.

Art Coppola

Good afternoon.

Alexander Goldfarb - Sandler O’Neill

Hey, just a question here on NOI. You guys have been speaking about converting the temp to perm and how that would boost NOI and just general, getting the work in the portfolio. And I wonder you guys have talked about being north of 4%, so just sort of curious, I think you’re about 3.5% sort of year-to-date what are the things that are going to get the portfolio up into the north of 4% range?

Tom O’Hern

So our guidance range was 3.75% to 4.25%. And obviously there is things that are hard to predict along the way but we typically see more momentum in the second half of the year. Obviously the leasing and the occupancy pick-up that happened in the second quarter doesn’t really benefit us until in the third and fourth quarters. So we certainly expect to see that the conversion of temp to perm, most of that benefit is going to be in the third and fourth quarter. So we see all those things. And at this point, we see no reason to change that guidance range of 3.75% to 4.25%, was artificially low in the first quarter because of some of the expenses I mentioned on that call. Also keep in mind we had a big quarter in the second quarter last year. So we’re comping against the quarter that was up 4.6%. At this point we’re not going to change the range.

Alexander Goldfarb - Sandler O’Neill

Okay. And Tom, just obviously you're not giving ‘15 guidance, but sort of on a run rate basis after we get through the changes in the portfolio this year, should we expect a 4% plus type as a good run rate?

Tom O’Hern

Yes, I think over time, I mean again from our standpoint a big factor in same center growth is going to be CPI index, because that's how we -- increases our leases every year. Mostly two times CPI formula, not to exceed a certain number in this year and particularly we had a relatively low CPI. The CPI; had gone up 1.1%, we had a 2, in most cases two times the factor on that, typically in the past was too much higher inflation rate than1.1%.

Alexander Goldfarb - Sandler O’Neill

Okay.

Tom O’Hern

So that's how it affects us but based on the way it's trending this year, it looks like CPI on a trailing 12 month basis, I think is running about 2.1%. And of course we have two times escalator, so we should be buying in fact in better shape next year.

Alexander Goldfarb - Sandler O’Neill

Okay. Thank you.

Operator

Our next question comes from Craig Schmidt of Bank of America Merrill Lynch.

Craig Schmidt - Bank of America Merrill Lynch

Thank you. Cascade Mall aside, is there any interest in buying out some of your JV partner share, particularly at some of your larger more dominant malls?

Art Coppola

Yes. But they're not sellers that we're happy to -- we’re thrilled with them as partners. So that's not an opportunity at this point in time.

Craig Schmidt - Bank of America Merrill Lynch

Thank you.

Art Coppola

Thank you.

Operator

And we'll take our next question from DJ Busch of Green Street Advisors.

DJ Busch - Green Street Advisors

Thank you. Street retail seems to be a property type and focus right now we’re seeing some REITs acquire some properties recently. It seems like that will be the natural owner of street retail, could be mall owners given the overlap in Tennessee. When we think about you guys strategy of owning the dense urban centers, seems like controlling some of these street retail corridors outside of your better malls and I am particularly thinking of North Bridge, Santa Monica place. It seems like that would be a natural progression of solidifying or fortifying your position. How do you guys think about some street retail opportunity in addition to some of the things you’ve already done in Chicago?

Art Coppola

I will start and maybe Bobby Perlmutter will also chime in on this. But first of all, you may have noticed, I certainly noted yesterday walking the streets of Chicago that the street retail resurgence and merchandising that we have accomplished on Ohio and Grand and Rush has been really remarkable here at North Bridge, we are actually in Chicago today conducting this call, It’s been unbelievable. Eataly was a huge addition, we added some great restaurants and it’s just a real reactivation of the street. And of course we also popped a new entrance up into the mall off of Rush and Ohio up into the mall and we are also beginning to re-merchandise some of the frontage that we have on Michigan Avenue. So yes I mean that’s an -- when we bought North Bridge mall, it had a great amount of street retail and so we have done a great job of re-merchandising a lot of that and creating active bid in store fronts where we used to have office users, health club users and ESPN zone things like that. And we have done really well with that.

Santa Monica yes, it’s a logical extension of Santa Monica place to think about, some surrounding real estate in that vein we were very happy as part of getting our entitlement to add a theater to the third level of the Bloomingdale's building at Santa Monica place. We entered into a excluding negotiating agreement with the city of Santa Monica to entering the long term lease of a parcel of land at Arizona which is one block away from Bloomingdale's in Santa Monica. And there is currently an obsolete parking garage there, we would tear down the parking garage and we would add a second theater location, so we would basically control all of the first run theaters in Santa Monica as well as some incremental retail on the ground floor which would be street retail. You pick the two cities correctly that are the logical ones that we might consider it.

Having said all that, I would be pretty reluctant to enter into the acquisition of street retail in markets where the retail is not absolutely contiguous or adjacent to an existing regional center, because it is really a business for sharp shooters and not the tenant.

There is a lot of profits, but when you are buying assets at two cap rates, you better be pretty certain about remerchandising plan over a long period of time.

I feel better about kind of what we're doing, when we're, we bought the street retail as part of the acquisition of North Bridge and we made a lot of money on the roll over of the various leases and we've really increase the productivity here in Chicago.

And I feel really good about the opportunity that we've got, that we're working on it Santa Monica, because it's a proven winning neighborhood for us. It supplements our mall in terms of the use, because when the co-branding the ArcLight that we would put 4th in Arizona with the ArcLight is going in the Santa Monica Place will drive the traffic back and forward between the two properties, so it's synergistic.

And we fully expect to see a high single-digit return on our investment on that street retail investment that we're looking at 4th of Arizona which probably, it could range from anywhere from $30 million to $75 million, our investment there depending on whether we just do it either $30 million to $75 million our investment there depending on whether we just do a theater or we also do a little bit of street retail as part of it. Bob you want to add to that a little bit?

Robert Perlmutter

The only items I would add is the other center that we own that could fit into those characteristics is Walnut Creek Broadway Plaza and Walnut Creek which has a very developed street district. Cleary there is retailer demand and in particular there is certain retailers that prefer the street and often prefer the street around a larger shopping center or a shopping district.

So there is different tenant demand but as Art said it's not inexpensive real-estate to purchase and it's a very fragmented ownership.

DJ Busch - Green Street Advisors

Great, thank you.

Robert Perlmutter

Thanks Jim.

Operator

Our next question comes from Rich Moore of RBC Capital Markets.

Art Coppola

Good afternoon Rich.

Rich Moore - RBC Capital Markets

Guys good afternoon. The big drop this quarter in operating expense I mean I realized there was obviously some change from the first quarter in terms of snow and weather kind of thing but was the big drop in the second quarter strictly that or is there something in else in that operating expense number that's better than usual?

Art Coppola

Rich there was also some dispositions in the first quarter full effect discussed in the second quarter they were small assets but nonetheless they had some of those operating ones.

Rich Moore - RBC Capital Markets

Okay. So going forward then Tom this is a pretty good run rate or pretty good starting point?

Tom O’Hern

Yes I would say this is a good run rate discussed the factors that are acquisition distribution activity.

Rich Moore - RBC Capital Markets

Okay, great thanks guys.

Tom O’Hern

Obviously things like utility expense were much higher in the first quarter because of the severity in winter.

Rich Moore - RBC Capital Markets

Right I got you good yeah. Thank you.

Operator

We'll take our next question from Paul Morgan of MLV.

Paul Morgan - MLV

Hi, good afternoon. Just on the outlet the comments you've made about new developments and also you are about anniversary Chicago and maybe just do you have any thoughts or I mean takeaways from the first year there? And we just separate it looks like it might come in around $700 a foot. How is that relative to where your performance is occupancy just a bit and where is the sweet spot of retail demand and as you think about other urban centers Chicago a template in terms of where you market in terms of the upscale versus mass market?

Art Coppola

I mean so you’re interpolating our expectation of the sales per foot at $700 give or take that first year that’s about right. And we don’t have all 12 months, so when we have them we’ll publish that number or at least talk about it. That exceeds the expectations of that most had, it’s pretty much in the mid point of the market research that we’ve done in terms of estimating it. To built that outlet center on 500 and some thousand square feet and have it produce $700 a square foot in the first year is pretty amazing. It’s very rare, any center would start with that kind of number and so it’s a really impressive number especially given the skepticism that many had about the by viability of Fashion Outlets of Chicago outside of Macerich.

We -- it validates our belief in high barrier to entry infill urban markets for a very, very select number of these types of development. I don’t think there is more than a handful of this available to us in the United States but I do think there is a handful available and I think there is one or two hopefully that we’ll be able to talk about in a relatively near future. The productivity that we’re achieving at Chicago again is really unusual and yet it also represents the target base case that we’re shooting for when we think about other opportunities.

Paul Morgan - MLV

And so you're comfortable that the retailers based on the experience here or kind of rate to go up against other full price malls and major markets at where the location is?

Art Coppola

The retailers that are here universally are asking us okay now where else can we do this.

Paul Morgan - MLV

Great. Thanks.

Art Coppola

Thank you.

Operator

We'll take our next question from Michael Mueller of JP Morgan.

Art Coppola

Hi Mike.

Michael Mueller - JP Morgan

Yes, hi. I was wondering, do you see any activity at Atlas Park anytime soon and just going particularly with outlets could that be one of the areas that you're talking out for urban outlets?

Robert Perlmutter

Sure, this is Bob Perlmutter, Michael. Atlas Park has had a pretty good amount of activity, some of the key tenants and we've added included Forever 21, recently Ulta opened and TJ Maxx is under construction. So we're making a lot of progress have done some physical improvements to the green area and we're building some really good momentum from a leasing point.

Art Coppola

And no we're not thinking outlet there. We did think about a year and a half ago, but it doesn't work.

Michael Mueller - JP Morgan

Got it. Okay. That was it. Thanks.

Art Coppola

Thanks.

Operator

Our next question comes from Vincent Chao of Deutsche Bank.

Vincent Chao - Deutsche Bank

Hey, good afternoon, everyone. Just wanted to go back to the guidance again real quick, just thinking about the quarterly number was ahead of your expectation or at least your guidance there and then you talked about some a little bit less dilution from some of the asset sales. So I was just curious beyond the income tax benefit that you booked in the quarter. Was there any else that’s sort of one-time in nature here in the quarter that boosted the result and maybe comes off the run rates going forward?

Tom O’Hern

Now that was about it and that was roughly $0.02 a share that benefit.

Vincent Chao - Deutsche Bank

Okay.

Tom O’Hern

The rest of it, it gets pretty close to where our guidance was if you take that out certainly it was pretty much around top where the street was.

Vincent Chao - Deutsche Bank

Okay. I guess it does seem to imply a little bit higher level than the guidance would suggest so it’s kind of what I am trying get at a little bit more.

Tom O’Hern

Well as art already indicated we are still expecting to finish off the year with some dispositions to get to that $250 million number. So the dilution from those would back end weighted.

Vincent Chao - Deutsche Bank

Okay, thanks.

Operator

Our next question comes from Haendel St. Juste of Morgan Stanley.

Haendel St. Juste - Morgan Stanley

Hey good afternoon.

Art Coppola

Good afternoon.

Tom O’Hern

Hey Haendel.

Haendel St. Juste - Morgan Stanley

So your comments earlier on the remaining contemplated mall sales of $250 millionish, sounded like you could be comfortable holding on to the assets for some time. Is that a function of the pricing demand for the assets or is there perhaps something within that comment that we are not fully appreciating?

Art Coppola

The major message you should take away from it is that we are formally out of the disposition business and we are done. That doesn’t mean we are not going to continue as we have in years passed to opportunistically sell assets on a one-off basis and this year our guestimate in terms of giving guidance is that we would have $250 million of net dispositions which remains our guesstimate for the year, but there is nothing more to read into it.

Haendel St. Juste - Morgan Stanley

Okay. And then more if I may your comment on bad debt expense being unusually high this quarter due to some borrowers and local retailers, looking ahead where do you think expect that bad debt expense to be near-term going forward and do you expect it to remain elevated near-term as a result of local retailers?

Tom O’Hern

No I don’t think so. I don’t think we can extrapolate from this quarter it was a relatively unusual quarter. Obviously we have had some bankruptcies this year, Sbarro and more recently we had few small ones Hot Dog on a Stick, Love Culture, but they don't take a lot of space, nor do they pay a lot of rent. So we may see some of that ripple through. But it's hard to predict that one that lease terminations are the two hardest to predict. But I think it will be less than $2.5 million, but we could be more than the $1 million that we've been running the last 3 or 4 years on average per quarter.

Haendel St. Juste - Morgan Stanley

Thank you.

Operator

Our next question comes from Todd Thomas of KeyBanc Capital Markets.

Todd Thomas - KeyBanc Capital Markets

Yes, hi. Good afternoon. Just following up on dispositions a bit. Last quarter Art, you seemed to make some comments around the environment, saying it was little bit better than expected and you commented that cap rates on the sales will be closer to 8% versus 9%. Is that consistent with what you’re still seeing today and maybe could just comment on sort of the market and the buyer pull today?

Art Coppola

I'm not the best person to ask anymore, because we are officially out of the disposition business. However, I can make an observation as an interested bystander. I thought the pool was getting bigger, I now am not sure. In terms of any dispositions that we would do throughout the balance of the year, my guess is that they would tend to be on average in the 8%, maybe 7.5% type of cap rate. But given that no properties are under contract at this point in time, that's so speculative.

It seems that the buying pools a little more confident, way more confident than it was a year ago. 3 months ago, I may have gotten a little ahead of myself in terms of guessing about the growing size of the buying pool. But again, since we're really not in the disposition business right now. We're really just a one-off opportunistic seller, if something is attractive to us, I‘m probably not the best person to ask.

Todd Thomas - KeyBanc Capital Markets

Okay, that's fair. And then just one other question, curious about the comments around Cascade Mall. Tom, I think you characterized it as an accommodation for your partner. I was just curious what that means and whether you can elaborate on the go forward strategy with that center since it seemed like that that's not a core holding for Macerich long-term?

Tom O’Hern

Todd, you are right, it's not a core holding, it's a very, very small asset, I mean our price to purchase that it was unencumbered with $15 million, so not a significant transaction. Our partner was motivated to move out of that particular asset. And frankly we felt it was an asset if owned a 100% of gave us more flexibility to perhaps package with other assets in the future and part of a group of assets that were sold.

So nothing more than that. Small transaction, and it's with the good partner and partner that we have other assets with and we're happy to accommodate them.

Todd Thomas - KeyBanc Capital Markets

Okay, thank you.

Operator

We'll take our next question from Jim Sullivan of Cowen & Company.

Jim Sullivan - Cowen & Company

Thank you, good afternoon guys. Art, I've got a quick question for you regarding the direction of occupancy cost. Obviously you’ve got a couple of cross currents in the portfolio here as a result of all the asset sales the average productivity is moving higher. And I guess it's kind of axiomatic or we tend to believe that higher the productivity, the higher the occupancy cost you can generally get. May be that's true, may be that isn’t.

On the other hand, the outlet center business historically has been a sector where the occupancy cost as percentage of sales has been a little bit lower. So help us understand where you think that's going to go as you continue to improve your winners as you described them and at the same time look to continue to grow your outlet center business?

Tom O’Hern

Well Jim, we’re still on a relatively low level, if you take the unconsolidated and consolidated, I think our blended rate is 13.5%. And you’re absolutely correct that percentage can be much higher, the higher of the quality the assets are. And we think given the fact we’ve disposed slower growing assets, we’ve got lot more leasing momentum. And I think the evidence of that is what we’re seeing our re-leasing spreads as well as our occupancy pick-up and we think we can continue to push that. And you know as well as anybody that that number moves very, very slowly; the only time moves quickly it moves was on the direction when sales plum it. But when you’re re-leasing space and get your hands on maybe 8% to 10% of that space, it takes a lot of to push that number up but we think there is a lot of upside and room in that occupancy cost number.

Art Coppola

This is a terrible generalization, so please don’t hang me on it. But if our overall occupancy cost as a percentage of sales is in the 13% neighborhood?

Art Coppola

13.5%.

Art Coppola

13.5% and our total sales per foot is in the high $500s. What I would suggest to you is that 13% on a $500 foot center maybe it feels about right overall and you have 20% on a $1,000 foot center feels about right overall. And you can kind of do a straight line bar chart along the way and find yourself getting comfortable at 15% and 16% cost of occupancies for centers that are doing $700 and $800 a foot and again those are terrible generalizations, but I certainly don’t want to be hung to drive with them. But if I have to answer your question, it’s very clear to us that these centers that we own that do a $1,000 a foot and we’ve got several of them in that zip code right now or headed the way. The tenants can up for to pay you very high double-digit 18%, 19%, 20% cost of occupancy we’ve run Queens Center at 20% cost of occupancy from the day we owned it and we did that when the center was doing $600 a foot and we're doing it, we're leasing space today at times at 30% of the $1,000 a foot average. We're leasing space at Queen center $300 plus rents on some deals and you have to center average is a $1,000 a foot.

Going to the outlet side, I'm not the best person to ask about that obviously there are others that have a lot more experience in this arena, but we do have some experience that at Fashion Outlets in Chicago where we've had some spaces come back to us which is very normal in a brand new development for the winners to emerge and those they don't belong there also define they don't belong there for early on. And we've had tenants where we merchandised space already where we're getting rents over a $100 square foot for a center that averages about the $700 a foot so far run rate today, which would imply 15% cost of occupancy on today's average sales put at that center, which again makes sense to me that you can charge those kinds of rents.

So it's clear that the higher the sales per foot especially is to get over $500 a foot that the tenants basic cost of goods business once it's covered, the incremental cost of doing business allows them to pay a higher rent charge and still make money.

Jim Sullivan - Cowen & Company

So should we assume $700 per foot urban outlet center would justify a comparable occupancy costs to a $700 per foot regional mall?

Art Coppola

I doubt it.

Jim Sullivan - Cowen & Company

A little bit lower?

Art Coppola

I’m the one that has said to you, even though we have an anecdotal experience that we've seen that happened we are not experts in this arena we only have a couple of data sources to measure against but we are not bashful in terms of asking for those kinds of rents and so far we have gotten them but the pundits would tell you that there is a little difference and I suppose there is but once it’s a proven winner especially a $700 a foot center I am not sure there is that much difference between old price and our price.

Jim Sullivan - Cowen & Company

Okay guys, thanks.

Art Coppola

Bob Perlmutter may want to add to that.

Robert Perlmutter

And this is Bob Perlmutter the only thing that I would add is I would tend to agree with Art in terms of it may not be exactly the same but clearly the spread is going to narrow especially for as we believe there is a distinction between the real premium must have outlet locations and the more traditional outlet locations.

Jim Sullivan - Cowen & Company

Okay, very good thanks guys.

Art Coppola

Thanks.

Operator

We will take our next question from Ben Yang of Evercore.

Ben Yang

Hi, good afternoon thanks. Art I understand you recently hired some executives from AWE Talisman recently so just curious if you can talk about their roles at Macerich and if the plan is to eventually build an in-house outlet theme so that you can do these projects solo going forward?

Art Coppola

Okay, so we have internalized the leasing function by adding two senior leasing people to our staff in the last couple of months. We have also internalized the marketing function by adding a very senior national marketing person to our staff and marketing in the outlet world has important at times at least as important as the leasing, so that’s a very important job and we have taken over the day to day management of Fashion Outlets of Chicago and Fashion Outlets of Niagara. So as of today we are vertically integrated in all function in the outlet world.

Ben Yang

I mean given obviously you are hiring people for this particular platform you mentioned one or two new projects I guess than you might announce in the near-term I mean is there any vision or goal in terms of how big the outlet platform will be I don’t know maybe two or three years now?

Art Coppola

I would say that in five years from now, we'll have five really good outlet malls and today we have two, but that that would be a really good days work.

Ben Yang

Great. Thank you.

Art Coppola

Thank you.

Operator

We'll take our next question from Linda Tsai of Barclays.

Linda Tsai - Barclays

Hi, thanks for taking my question.

Art Coppola

Hi.

Linda Tsai - Barclays

With respect to the five groups within your property rankings. How do you think about the opportunity to become more productive? For example how much more productive can group one or two be versus say group four and five?

Art Coppola

Philosophically, I would tell you that group one and two can always be more. The better center is the better you can make it. The idea that you kind of top out just is not true.

Because even within these centers, what you have to do is dig within the numbers. And I talked about this in a previous call and I don't have the numbers exactly handy to me right this second. But of the top ten centers, the average $860 square foot in our portfolio. Within those 10 centers, the top two-thirds of the tenants within each category average around $1,150 or $1,200 square foot. And the bottom 33% of each category at those centers averages and I have talked about in the previous call, but I think its $400 a foot give or take.

And so there is a huge opportunity to take and essentially take the underperformers within these highly productive centers and to recapture those spaces and to re-let them at higher rents. So, we talked about a bankruptcy situation earlier with Love Culture. We have 88,000 square feet with Love Culture today. They have some really good centers with us and we have 10 stores with them. They average of $188 square foot in those 10 scores. They pay us mid $50 rents in those 10 stores. The centers that they happen to be in are all in our top 20 and those centers average $585 a square foot. And the average rents that are in place for those 10 Love Culture locations are around $92 a square foot for the centers in question. There is a big opportunity there over time to re-merchandise that space at a substantial profit.

Just intuitively when we look at the bottom 10 assets that we own, there is a reason that they are doing $300 a square foot and a lot of times just because they are in secondary or tertiary market. And the opportunity to make a center like that to grow it dramatically is just not the same as it is to take a great center and make it greater or really good center and make it great.

And that's why we did all of the pruning that we did. And we're taking all that money that $1.5 billion ploughing it into our best centers because those are the most elastic in terms of the upside.

Linda Tsai - Barclays

Thanks. And then I just had a follow-up. Tom, I think you made a comment earlier about tenant reimbursements and there are being some moving parts. Are you expecting tenant reimbursements to increase over the next couple of quarters?

Tom O’Hern

No, it wasn't tenant reimbursements, it was lease termination payments.

Linda Tsai - Barclays

Okay.

Tom O’Hern

We expect we are having conversations today that could lead to accelerating some of those rents. So that's always an estimate. And I think our guidance initially had $8 million or so estimated for that this year. And we could see more that activity accelerating in the third and fourth quarter.

Linda Tsai - Barclays

Thanks.

Operator

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

Art Coppola

Hi Tayo.

Operator

And Tayo has disconnected. We’ll take our next question from Ki Bin Kim from Suntrust Robinson Humphrey Inc.

.

Ki Bin Kim – Suntrust Robinson Humphrey Inc.

Thanks. Just an accounting follow-up, is there any drag from redevelopment activities on same-center NOI, the 6% that you reported this quarter?

Tom O’Hern

I am sorry, the same-center NOI, is there any redevelopment drag?

Ki Bin Kim – Suntrust Robinson Humphrey Inc.

Yes.

Tom O’Hern

There is a little bit, the major redevelopment properties are not in there, Broadway Plaza is not in there for example, Fashion Outlets in Niagara is not in the number, Fashion Outlets in Chicago is not, it hasn’t been around for a full year. And so, there may be a little frictional vacancy at Tysons for example that’s hitting that number that should reverse itself actually in the next quarter or two. And then, Bobby?

Robert Perlmutter

No there is just some major remerchandising projects going on at Queens and Kings as part of the 10 year cycle.

Ki Bin Kim – Suntrust Robinson Humphrey Inc.

Okay. And then kind of related to that, as your projects come on line over the next 12 months or so, how do you guys categorize these activities or these projects in your -- within your same-center NOI definition?

Tom O’Hern

They’ve got to be in – they have be completed and in for the full period, full quarter, in this case before they’re included. So for example, a project that finishes Fashion Outlets in Niagara, if it’s finished and leased up in the fourth quarter of ‘14, it would not become a comp center until the first quarter of 2016.

Art Coppola

But the money you make incrementally improving and existing center if there is major capital involved is not same-center NOI that they return on that investment. Correct.

Tom O’Hern

Correct, okay. Just that’s what so we're talking about. I mean if you are adding space its not included.

Ki Bin Kim – Suntrust Robinson Humphrey Inc.

Okay. Alright, thank you.

Operator

We'll take our next question from Ross Nussbaum of UBS Financial.

Jeremy Metz – UBS

Hey good morning, I am Jeremy on with Ross. Just one, quick one sorry if I missed this. Can you talk about the increasing costs at your Niagara development it seems like they were up a little over 10% no change of yields, so this just some extra build out that tenants will compensate in the rents?

Tom O’Hern

No, it’s a combination of things addition, we're actually achieving better than budget rents, we expanded the scope of the project a little bit to include some renovation to existing center and there is some shifting in the TI. But this some minor additions and improvements and that is strong budget and we had the room to do it so we expand to the scope a little bit.

Jeremy Metz – UBS

Similar with Los Cerritos house it seems you came in a little below where you were thinking is any changes to the plan there just better than I expected pricing?

Tom O’Hern

No it just the finalizing in the negotiations on the two big deals. So we now have it's an estimated numbers we get hard numbers.

Jeremy Metz – UBS

Great. Thank you.

Tom O’Hern

Thank you.

Operator

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

Tayo Okusanya - Jefferies

I just good afternoon apologize for that. I would just hope you could make some comments about what you're seeing is that retail outlook specifically traffic at your malls and what that could be indicative of going forward?

Art Coppola

I think the most telling number is our total sales numbers that we've shared with you today over the past 12 months which were up 4%. On traffic, in our centers is pretty much flat to down 1% which is pretty substantially different in the numbers that have certain companies that claims to be expert in measuring traffic has published about shopping malls.

And look we now is at the centers that we own today are extremely attractive places to be and retailers want to be there and customers want to shop there.

Tayo Okusanya - Jefferies

Okay, that’s helpful. Thank you.

Art Coppola

Thanks Tayo.

Operator

And it appears there are no further questions at this time. I would to like to turn the conference back over to today’s speakers for any additional or closing remarks.

Art Coppola

Well, thank you very much for joining us today. Again I would encourage you look at the some of the photos and rendering you will find that are new supplements might give you a little better feeling for some of our development projects so that’s new to our supplement, feel free do that. And if you are in the Tysons area please stop by and take a look at the new plaza it’s really pretty spectacular and really appreciate your support and look forward to speaking with you and meeting with you over the balance of the year. Thank you very much. Bye.

Operator

This concludes today’s conference I thank you for your participation.

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