Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

The Macerich Company (NYSE:MAC)

Q2 2012 Earnings Call

August 1, 2012 1:30 p.m. ET

Executives

Jean Wood – Director of Investor Relations

Thomas O’Hern – Senior Executive Vice President and Chief Financial Officer

Arthur Coppola – Chief Executive Officer and Chairman of the Board

Analysts

Chris Schmidt – Bank of America

Quentin Velleley - Citi

Jeffrey Donnelly - Wells Fargo

Steve Sakwa – ISI Group

Michael Mueller – JPMorgan

Rich Moore - RBC Capital Markets

Christy McElroy – UBS

Paul Morgan - Morgan Stanley

Operator

Good day and welcome to the Macerich Company Second Quarter 2012 Earnings Conference Call. Today’s call is being recorded. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a Question-and-Answer Session. Instructions will be provided at that time for you to queue up for questions.

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

Jean Wood

Hi. Thank you everyone for joining us today on our Second Quarter 2012 Earnings Call. During the course of this call management will be making forward-looking statements which are subject to uncertainty and risks which are associated with our business and industry.

For a more detailed description of these risks, please refer to the Company’s press release and SEC filing.

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 that defined by the SEC Regulation G. The reconciliation of each non-GAAP financial measure to the most directly comparable GAAP measure is included in the press release and a supplemental 8-K filing for the quarter, which are posted in the Investor section of the Company’s website at www.macerich.com.

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

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

Thomas O’Hern

Thank you, Jean. Today we are going to be discussing the second quarter results, our capital activity and our outlook for the rest of the year.

We continue to see strong improving fundamentals in our business. Retail sales had another strong increase and same –center ROI was positive for the tenth quarter in a row.

The re-leasing spread showed double digit increases again, in addition, occupancy was up 30 basis points compared to a year ago, at a very healthy level of 92.7%.

During the quarter we signed leases for 266,000 square feet, average starting run of 45.64 and a positive re-leasing spread on a trailing 12-month basis of 165.

The occupancy of 92.7% was up 60 basis points sequentially compared to the March 31st occupancy level, a strong gain for the quarter.

Occupancy cost as a percentage sales came in at 12.7 for the trailing 12-months. That’s down compared to 13.2 at June 30th of last year.

FFO adjusted which excludes the impact Valley View and Prescott was $0.74 a share. The operating results for the quarter included same-center NOI excluding termination revenue and SFAS 141 was up 2.9%.

Management company expenses were up for the quarter at $23.7 million. However, that has to be looked at on a year-to-date basis due to timing differences. Year-to-date, management company expenses are $46.3 million compared $46.7 million for the same period of last year.

Valley View Center had been in receivership since mid-2010, it was sold in April and concurrent with that sale the debt and all accrued interest was forgiven. We booked an extinguishment of debt mean of $104 million.

In May, Prescott Gateway was conveyed to the lender in a deed in lieu transaction and a $16 million gain on extinguishment of debt was recognized.

Those gains on debt extinguishment on Valley View and Prescott are not included in AFFO.

Looking at our balance sheet, our debt-to-market-Cap at quarter end was 40%. Net-debt-to-EBITDA was 7.3 times and our interest coverage ratio in the quarter was 2.6 times.

It continues to be a great financing market but extremely low rates and a significant amount of capacity. We are taking advantage of this market. We began 2012 with an average debt maturity of 3.2 years. As a result of the refinancing and debt reduction year-to-date, as of June 30th we have extended the debt maturities schedule to almost four years.

By year-end we are expecting the average debt maturity schedule to closer to five years, the average debt maturity. In addition, since the loans we’re putting in place are long-term fixed rate loans, the excess proceeds are being used to pay down our line of credit. And by year-end, our floating rate debt will only be about 20% of our total debt.

And I would expect that to continue to go down in 2012 as we move forward with our 2013 debt maturities.

Some of the recent activity includes a $200 million loan on Chandler. That was a seven year deal at a fixed rate of 3.77%. That replaces the prior loan which had a coupon of $5.48%.

We also closed on a $220 million loan on the Oaks. That had been a floating rate loan before, the new loan is a fixed rate 10-year deal at 4.1% interest rate.

We are also getting fixed rate quotes on Chester Field and Rimrock, two currently unencumbered assets. The proceeds from those two deals were estimated to be between $160 million and $180 million and that will be used to pay down floating rate debt on our line of credit.

We are also currently in the market on Kierland Commons, Westside Pavilion and Deptford Mall. We expect those transactions to close in the third quarter.

In this morning’s earnings release, we maintained our adjusted AFFO per share guidance in the range of 306 to 314, our assumptions are largely the same. So for now, we are not increasing our guidance range but we will readdress that next quarter.

Looking at the AFFO split for the remaining quarters, the third quarter we estimate to be 24% to 25% of the total year and the fourth quarter would be 27% to 28%.

Looking at tenant sales, small tenant sales per foot on a trailing 12-month basis were up 12% to $513.00 a foot for the 12 months ended June 30th.

At this point, I’d like to turn it over to Art.

Arthur Coppola

Thank you, Tom. As you can see, our sales trends, our leasing trends have been very strong, which is reflective of our industry. The financing markets continue to be extremely attractive for strong regional malls and we’ve been tapping into those with a lot of new activity going forward that will be reducing our floating rate debt as well as extending our maturities as Tom outlined.

On the disposition front, as Tom has mentioned, we had a lot of activity. It doesn’t add up to a lot of dollars but it’s a lot of activity and it helps us to maintain and really prune and refine our focus, particularly, in our Arizona markets.

We have had assets in Arizona. We had Hilton Village, a small specialty center on Scottsdale Road. The Borgata, another small specialty center. We had a power center, Chandler Gateway, another power center, Chandler Festival Center, another, Chandler Village Center, each of which we own 50% interest in. We had a power center around San Tan Mall that we owned a 35% interest in, that we’ve sold, all during the first six months.

In addition to that, we sold our 100% of a small specialty center in Carmel, as well as one of the old Mervyn’s boxes that we owned in a regional mall that we do not own.

But when you add it all up, we have eight operating assets that we sold. They don’t add up to a lot of dollars but it does give us the opportunity from a timing view point to keep our focus particularly in our important Arizona markets on our major regional malls in those markets.

On the disposition front, we do anticipate that we will exceed the total that we had put into our earlier year guidance of $300 million to $350 million. Today, we’ve had total sales, our pro-rata share of about $180 million but the total sale of the assets were significantly more valuable than that because as I mentioned, we had partial interest that we were selling.

And we would anticipate that over the balance of the year that we’ll exceed total dispositions of over $400 million with total equity raise being in the neighborhood of $240 million to $250 million. We’ve currently raised net equity of around $126 million from the sales that we’ve had to date.

So, we are on a path in our pruning process. It’s always hard to predict exactly when dispositions are going to occur and that’s one of the reasons that any year where you’ve got choppy dispositions, we didn’t feel comfortable amending our guidance at this point in time.

Turning to development activities. We’ve really got two projects in the ground right now. One is Chicago Fashion , Fashion Outlet for Chicago. That project is doing terrifically. If you happen to land in Chicago and you’ll drive by the site there, you’ll see the steel coming up out of the ground.

The project is extremely well-positioned. We have leases, 62% of the space are completely documented in signed and another 25% or so of the space is in lease comment, in negotiation right now. The space if virtually 100% committed. We anticipate an opening of August of next year. It’s on time and on budget in all respects at this point in time. And again, we think it’s going to be a great center.

As you may remember, we have a construction loan on that project, so the total equity that we’ll be putting into the construction there is a little over $60 million to $70 million, give or take. And we anticipate very large, good double digit returns on the total project and of course on our equity component it will be significant. We already funded a fair amount of that equity as it was used to prime the construction loan.

This week, some of you may have seen announcements on Tysons Corner which is the other development that we are in the ground on. And I thought it would actually be a good time to kind of reflect on where we are on Tysons, how we got to where we are and where we’re headed.

You may remember we bought Tysons Corner in 2005 when we bought the private company developer [Wilmer Wright]. Immediately upon it’s acquisition, we were embarked upon an expansion of the center which included the addition of an AMC Theater and entertainment wing and a restaurant wing. The redemise of an old JC Penny’s store and it really put the center to it’s next level of success.

That AMC Theater is their best theater in the U.S. outside of New York City and it’s in the top five movie theaters in the U.S. It drives a very successful entertainment wing and as a consequence of that expansion we added a couple hundred dollars a square foot in sales to Tysons Corner which already was a real powerhouse.

When we bought, Wilmer Wright in 2005, we became aware of the fact that this particular site was grandfathered in terms of the master plan and that there was an opportunity to obtain entitlement to expand the center that no other piece of land in Northern Virginia, Fairfax County was able to tap into.

So we continued the efforts of our predecessor to perfect those entitlements. And after three years of effort, in early 2008, we did perfect those entitlements and attained the right to add roughly 3 million square feet of space to the center.

At that point in time, the exercise was simple one of entitlement. Of course when the financial crisis in fall of 2008 hit the idea of working on those entitlements obviously became moot for a period of time.

As time progressed, then the Metro Rail got legs in the Washington D.C. area and it got funded. And currently that rail which connects Tysons Corner to the Capital and will connect Tysons Corner to Dulles, is under construction. If you drive by Chain Bridge Road or anywhere near that area, you’re going to see above ground monorail-type of construction.

And that rail is going to change the entire traffic patterns in Northern Virginia and in Tysons Corner. The only complaint people have about Tysons Corner today, is it’s too successful and it’s too difficult to get to because there are too many people coming there.

This is going to open up the flow of traffic. That, combined with a tremendous amount of offsite improvements that we helped to sponsor and even fund, in terms of hot lanes, the new Chain Bridge Road bridge and improvements to Chain Bridge Road and, literally seven different road systems around us are going to dramatically increase the accessibility of Tysons Corner.

The Rail opens later next year. It will be fully operational, we think, and open to the public in late 2013. Current estimates are that about 8,000 per day will use the rail system. Now the rail station itself is across the street from Tysons Corner. In looking at our expansion opportunity, part of the things that we wanted to tap into and one of the reasons that Fairfax County commissioners gave us the right to expand, is that we were willing to cooperate with them and provide access to Tysons Corner from that rail station.

And together with them, we planned a bridge that would cross the road and bring passengers from the rail station over to our side of the street. We provided some land area that would provide an opportunity for buses to drop off and pick up people on our side of the street.

And so, we really opened up our front door to the rail station. The work that we are currently underway with, we decided to move forward with the construction of an elevated plaza and bridge system that will connect us to the rail station. On top of that plaza, we have plans to erect an office building, a residential tower and a hotel tower.

When we elected to move forward on this, a great deal of the motivation was to enhance the retail experience. We think that by building this new urban environment at our front door of our center and connecting to the rail station and having this elevated outdoor plaza is going to create an environment that is unlike anything else in the district, frankly, unlike anything else in the United States. And we are fully confident that the addition of this mixed use development and the creation of an additional 5,000 to 6,000 people per day in terms of foot traffic that will either work, live or use the hotel facilities should easily translate to dramatic increases in sales per foot.

It creates a new second level entry to the shopping center and we are extremely confident that this is going to help us take our retail asset and take it to the next level.

When we decided to pursue building the expansion on our own, it was a joint-venture decision between ourselves and the Alaska Permanent Fund. Alaska, in looking at the numbers, felt that the development returns were so attractive that we should build it ourselves. And we concurred with them and also decided to do it in this manner, because by being the single-source developer, we can maximize the synergy of the traffic patterns between the residential, the office, the hotel and the shopping mall.

Together as partners, we and Alaska can always decide after we have developed out the project if we want to monetize one of those elements of the project. But we felt it was important to build it on our own. We also felt though, that it was important to bring in “Best of Class” developers in each of those categories to deliver a “Best in Class” building and bring the strength of leasing that would come with their unique development expertise.

And so you may have seen earlier this week, that we announced that we have signed development agreements with the Hines Organization to oversee the office development and they have been extremely involved in every aspect of that, value engineering, the leasing, as well as even the integration of the office to the overall plaza area and the master planning.

We brought in the Kettler Organization which was prior developer in the Tysons District and in Washington D.C., they are one of the most respected residential developers in the D.C. market. They have over 20,000 units. And we brought in Woodbine to be the advisor on the hotel component.

Currently we are building the infrastructure to support the plaza and to support a podium on which the office building, residential tower and the hotel will be built.

The burn rate that we have is about $5 million a month between now and April of next year. And the way that we’ve designed the project is that come March or April of next year we’ll make a determination of each of the three components, whether to continue vertical or to defer for a period of time the further construction.

We fully anticipate that all three elements will continue to be built but if we don’t like in particular where we stand on the leasing of the office building come April of next year, we have the ability to Cap-off the pad at that point in time and to not go vertical on the building until it is pre-leased to a level of satisfaction to ourselves and our partner.

So we feel that we’ve approached this perfection of the entitlement in a very sensible way. We feel that owning and creating the expansion on our own is the most sensible to enhance the retail experience and to create the most value for each of the components.

We brought in “Best of Class” developers, I think, on each of the three components to ensure it’s success and we’re very bullish about the final impact that this is going to have on Tysons Corner. The entitlements that we have on this project are invaluable compared with what it costs today to get entitlements in this district.

And again, a lot of this was driven by the fact that we did have the grandfathered right here but it is really driven by the opportunity that was created by the rail coming to the area and by our appetite to tap into that rail.

So, as we look at the funding of this, at this point in time Alaska and Macerich are funding this all cash. You may have observed from looking at our financial filing that we have relatively modest mortgage on Tysons Corner, just over $300 million and it comes due in 2 years.

We could easily, as a partnership, when we complete this project with a very modest expansion of that loan given the current income that comes out of Tysons Corner and the income that will be coming from mixed use development finance out of the entire development costs that we will have expended.

But we feel we’ve approached this in a very conservative way. We’ve looked at the idea of adding mixed use elements at different centers across the U.S. At this point in time, this is the only center that we feel that we will be participating in that in an ownership capacity. And we picked, basically, a center that has a catalyst that is driven by the Metro Rail. When you’re booking at one of the top five centers in the United States, in one of the best markets in the United States and the best location within that market and we’re very bullish on what we’re doing there but we’re very cautious of the overall risks.

But we’re convinced [NAV] creation, we and our partner the Alaska Permanent Fund is going to be dramatic but most importantly, it’s really going to further solidify Tysons Corner and set it up for generations to come. And with that, I’d like to open it up for questions.

Question –and –Answer Session

Operator

Thank you. The question-and-answer session will be conducted electronically. (Operator instructions)

And the first question will come from Craig Schmidt of Bank of America.

Craig Schmidt – Bank of America

Thanks. Good afternoon.

Arthur Coppola

Hey, Craig.

Craig Schmidt – Bank of America

The retail portion of Tysons that is going to benefit, it sounds like it is not from sort of expanding that space but from, let’s say, the raised traffic level, the enhancement of that entire shopping area, is that correct?

Arthur Coppola

And what’s really happening here is that right now, Tysons has a front door which is kind of the Port of Cache underneath the AMC expansion wing. And that’s a front door to the first level of the center but it doesn’t really have a front door to the second level of the center.

This is going to create a front door to the second level of the center and it’s going to create a new entrance to the center. More importantly, it’s going to create an outdoor center court that’s not going to be unlike the activity that we experience on the open air Santa Monica place, in the dining deck up there.

It’s going to be a public space. It’s 55,000 square feet plaza area and on that plaza area, we have opportunity to activate it with retail uses. They could be festival uses, they could be event-driven uses. And I think that basically what we’re doing is we’re creating a public space that is unique to the entire district. It’s unique, frankly, I think to any regional center that we know of in the United State.

And we are essentially creating an outdoor center court to complement our indoor center court, improving the penetration to the center, creating just another racetrack to the center in an area where the center is very successful but the anchors are not really heavily loaded either.

When we first decided to perfect the entitlement, our partner said something to us, Alaska. They said, “Let’s just not forget that what this is all about is protecting the golden goose that lays the eggs here. And that’s the retail.” Now, we haven’t lost sight of that and we think that’s going to be the big win out of the entire project as we go forward with this.

Craig Schmidt – Bank of America

And with rents that are rolling over between now and when you start to do this project, will you be able to get paid for it because they’ll be able to see that or does it make sense to sort of structure leases so that they roll over more after the event and you’ve made the improvements?

Arthur Coppola

We don’t have any extra-ordinary rollovers coming in that center other than there are a fair number that are coming up in 2015 and ’16 as consequence of our 2005 expansion. So the timing should be perfect given that the new penetration is going to be in the proximity of the area where we did our 2005 expansion.

But other than that, the lease rollover that we have in the center is fairly normal and just day-to-day. We get very solid rents there and we’re very bullish on what we think the impact is going to be to the sales productivity. Adding the hotel there when you think about it, at that particular center we think it is going to help generate a lot of sales productivity and be complementary.

When we added AMC, we essentially added around 2,500 to 3,000 visitors per day that came to the theater that weren’t there before and it resulted in sales increases at the center that were quite dramatic.

By adding an office tower, the workers there and the residents in the residential tower and the users of the hotel, we’re adding in excess of 5,000 to 6,000 a day between permanent and the tourists visitors that we don’t have today.

And add to that the 8,000 commuters and I think that’s a conservative estimate, they’re going to be using that rail station across the street and we’re going to be the only facility that is tied directly into that rail station.

We just think that the ease of getting to Tysons is going to be enhanced and the number of bodies that we can run through there, even as great as it is today is going to be added to. That always just translates into better daytime business and greater sales productive. And we think that the big win here is going to be in the growth of the value of the retail asset.

We think we’re making good money on each of the other components but the “eye on the ball” is on the retail asset and keeping ourselves plugged into the Metro Rail and really maximizing the benefit of that.

Craig Schmidt – Bank of America

Okay. Thank you.

Arthur Coppola

Thanks, Craig.

Operator

And our next question will come from Quentin Velleley with Citi.

Arthur Coppola

Hey, Quentin.

Quentin Velleley – Citi

Hey there. Just one quick one on Tysons, just given where office and hotel demand is, currently it’s quite weak in that market. What gives you the confidence to be proceeding with all three parts of the development at this stage?

Arthur Coppola

Well, again, as I pointed out, we’re proceeding with the infrastructure to support all three elements. We’re proceeding with the plaza which becomes a podium upon which all three elements will be built. And as we get into it, really our go/no-go decision on various elements really gets more serious in March or April of next year.

Our belief is that we will be pre-leased and we’ll have demand opportunities on each of the three components that will cause us to continue moving forward. But if we find that there are headwinds and that we are not along well enough in term of the demand that we have for each of the components, we have the ability to cap-off the construction on that component and to open up the balance of the plaza with the other, say, couple of components.

You know if you take a look at the market in Northern Virginia, Fairfax County, it’s got 26 million or 27 million square feet of office space. And you’ve got, say 7 million square feet of class “A” office space. But when you break it down, there is nothing even in class “A” office space that compares to the 500,000 foot of office space that we’re going to be adding here.

There is not one building in all of the 26 million square feet of inventory or the 7 million feet of class “A” office space that remotely has the amenity package, direct access to the Metro Rail, the entire district and that goes all the way out to the Reston.

All we have to achieve is the type of rent, office-wise, that they get at Reston, and we've got a big home run. The product that we're delivering is so much better, in terms of the amenity package. If you have an office at Tysons Corner, you're going to have a hotel that you're visitors can use, you're going to have a residential tower that some of your employees can live in, you've got the ability to your workers to be able to eat, shop, to play, right next door, and then you have this outdoor plaza.

It's the best product by far. We've met with a number of new tenants that are interested in coming. If you take a look at all of the office buildings within a mile or two within Tysons Corner, look at the name at the top of that building, chances are they're talking to us. We're not going to, when we're ready to announce our lead tenant, we will. If we don't find that we have a lead tenant at the rent that we want, the thing that gave us confidence to move forward on the infrastructure was the ability to pause, on the office tower, if we weren't where we wanted to be. We will pause, we in Alaska have made that decision. The same holds true on all three components.

Quentin Velleley - Citi

Okay. So, what kind of rent premium, given the higher quality of bill boarding, what kind of rent premium do you think you need to be at, relative to what's in the market at the moment?

Arthur Coppola

Like I said, if we get the rents that are currently being obtained at Trophy Office Space and Reston Town Center, our building is a home run. It's just north of $50.00 a foot.

Quentin Velleley - Citi

Okay. Thanks.

Arthur Coppola

There are plenty of precedents for those types of rent. Now, we're well aware of the headwinds in the market, but there is nothing else in the market like this, period, case closed. You're talking about, we'll own less than 2% of the inventory in the markets; and it's going to be best of class in every respect. We're very confident based upon the meetings that we've had. There are half a dozen lead tenants that we've already given presentations to, and we've got plenty of time. We're going to be stingy, if we don't get the rent that we want, we can pause and continue on. We have the infrastructure ready, and we'll be, in a short time-frame to build out, when we get the right lease tenants at the right rent. Alaska is very conservative, our partner, we're being very cautious here. Our advisers, I think are best in class, and we're all very bullish in the way we're doing it, but we've built in a hedge factor. Like I said, the burn rate between now and those types of decisions is around $5 million a month, which is tolerable, and our share is half of that.

Quentin Velleley - Citi

That's great. Thanks. Then, just [inaudible] you commented on some additional development projects or acquisition projects, in terms of the outlet sector. I think New York was a market you mentioned, and L.A. was a market that you've mentioned. Could you just give us a little bit more detail, in terms of what you're looking at and what you're thinking about in those markets?

Arthur Coppola

Just that they're long-term, our business plan remains the same. That we would like to have outlet centers in the same types of markets, that we have our best regional malls. So, we have said historically, that the markets that we love to do business in are L.A., San Francisco, the other major cities on the west coast, New York, Washington D.C. corridor, Chicago, and then Arizona. Those are our six or seven major markets that we have our best assets in, and that's where we're concentrating. Those will be the markets that we likely pursue outlet opportunities, so we're under construction and opening the one in Chicago. We own one in [upstate] New York, [below] Niagara Falls, obviously. Now the expansion of Niagara Falls is coming along well, in terms of the pre-leasing; but we won't reach a decision point on that, in terms of breaking ground, for another nine months or so. The other markets, they're really on our radar screen, and we would love to be involved in those markets, we think there's opportunity, but there's nothing to report on.

Quentin Velleley - Citi

Great. Thank you.

Operator

Next will be Paul Morgan, with Morgan Stanley.

Arthur Coppola

Hey Paul.

Paul Morgan - Morgan Stanley

Hi, good morning. Just going back to Tyson for a second. So, the economics of the development agreement, you and Alaska are continuing in terms of the ultimate investment, is to keep the pro-rata investment, in terms of the development partners. What's their position?

Arthur Coppola

Yeah. We're 50/50 owners, in the entire project. Together, we thought about selling off air rights, and development rights to other folks, and there were a long list of folks that would have loved to have bought the development rights. We decided together, that there was, frankly, too much money to be made. Also, the execution of the mixed use expansion needed to be integrated and cross managed, and cross marketed and cross developed.

This plaza, that connects us to the metro rail, and bridges over Chain Bridge Road, to the rail, and then creates this urban space. This 55,000 foot central outdoor space, up in the air above the current parking lot, and feeds into the second level of the shopping center, is such a key to the opening up of the second level of the center; and enhancing the traffic of the second level of the center, that common ownership was really dictated. We decided to do it on our own, and that's why we did it.

Now, together as partners, we could easily monetize one or more of those elements down the road. Like I said, we have such modest debt on Tysons Corner today, that even at very modest debt yields, we can finance out of whatever we spend on the project in total, when that loan comes due in two years.

Paul Morgan - Morgan Stanley

Could you see the way it was structured with the podium, could you see moving forward on one or two of the buildings instead of all three, based on marketing conditions. [inaudible]

Arthur Coppola

That's exactly right. We could decide not to proceed vertically on any of the three elements, and just finish off the plaza and have basically Subterranean parking in place, that will support the office building and the residential tower. Now, what's the cost of doing that? The cost of that infrastructure is probably $50 million, give or take. Look, given the time value of money, if you deferred the project six months to a year, or even two years, that's not a deal killer. The burn rate of having that behind you, because it would put you in a position where you would only go vertical when you felt the market was hot. Look, this is a once in a generation opportunity to create value.

So, what we're really doing here is making sure that we have the connection to the rail. We're doing the infrastructure, there was huge utility that had to be done, huge ring road work that had to be done, huge off-site work that had to be done, that's all been spent to date. Then, again, the key decision point on whether you go vertical on each of the three elements, is within that March to April, May time-frame of next year.

There's no magic to that, if we decide to pause on one of the elements, no big deal. We're going to build from strength. The one that would likely be most in question probably, would be the office one. Because you’re signing 10 year deals on the offer. On the residential, you're marking the market every 30 days, so timing is not critical on that.

Paul Morgan - Morgan Stanley

Thanks. Then my other question is just on the dispositions. You mentioned $400 million with $240 to $250 million of equity. Is that what's in your FFO guidance, and is that still all non-malls?

Arthur Coppola

The total of the guidance we gave was $300 to $350, recognizing that we'll try to sell some assets that may not sell, and there may be others that we initially weren't sure would be in the mix, that are. There could be a mall or two in there. We said that we're not just selling urban villages but other assets, so there could be a mall or two in there.

Paul Morgan - Morgan Stanley

Did you mention $400 million or did I mis-hear that?

Arthur Coppola

You hit the right number. Our original guidance numbers for the entire year was [inaudible] was going to be between $300 and $350, and I did comments that I felt, in fact, our [inaudible] share will be closer to $400 to $450, so it will be higher. What Tom is adding, is that there could be an interest in a mall, that was a non-core interest involved, in that sizing. We'll see.

Paul Morgan - Morgan Stanley

Okay. Then, last, you had the Cap rates on the deals you did close?

Arthur Coppola

Yeah. The deals that have closed to-date are just under 7%, probably 61/2% to 7%, of blended cap rates. There are small deals. There are partnership interest in a lot of them. Overall, from an energy viewpoint, it gives us a lot of capacity to refine our focus. It was a bigger disposition than the dollars would seem to have left. Again, most all of these assets that we disposed of were in the English market place. So, this now leaves us with really, just the regional mall investments that we have there with the exception of one or two urban villages.

Paul Morgan - Morgan Stanley

Great. Thanks.

Operator

Moving on to Christy McElroy with UBS.

Christy McElroy – UBS

Hey guys. Just to follow up on that last question, with regard to dispositions, I just want to make sure I'm clear. That's $400 million to $450 million pro-rata by year end?

Arthur Coppola

That's our best estimate, yes.

Christy McElroy – UBS

At this point you've completed $180 million, do you have anything else contracted at this point?

Arthur Coppola

Excuse me?

Christy McElroy – UBS

Do you have anything under contract at this point?

Arthur Coppola

You know, we have a policy that we don't comment on the specifics of acquisitions or dispositions, and we find that's a good policy. That's our best guidance. That's all I can do is give the guidance, today.

Christy McElroy – UBS

Okay. All right. Tom, you mentioned the assumptions that are in guidance are largely the same. Can you confirm, I think your prior, same-center NOI growth guidance was 2 1/2 to 3 1/2. Then your occupancy guidance was up 50 basis points, is that still about right?

Thomas O’Hern

That's right. The same-center NOI growth, that's excluding lease termination, and SS141 that was in our guidance was 2 1/2 to 3 1/2, and through six months we're at 3.1%. So, we're right there, right in the middle of the range, and that remains the same.

Christy McElroy – UBS

Okay. Just lastly, regarding the income tax benefit in the quarter. Just wondering what that was related to, and what you do you have in guidance for the full year, for sort of net expected tax benefit or expense?

Arthur Coppola

Yeah, you get little, that's through the taxable REIT subsidiary, Christy, and when you dispose of an asset sometimes you get a small tax, sometimes you get a small benefit. If you look at it year-to-date it's only about $1 million. That's not particularly big, and we factor in, I think based on last year, maybe $2 million of gains for the year, $2 million of tax benefit for the year. It's relatively small, and in some cases in some stores it's going to be an expense, and some stores it's going to be a benefit. Either direction it's not going to be too significant.

Christy McElroy – UBS

So, would you stay on par with last year, about $2 million benefits?

Arthur Coppola

Yes.

Christy McElroy – UBS

Okay. Thanks.

Operator

Next will be Rich Moore, with RBC Capital Markets.

Rich Moore - RBC Capital Markets

Hi, good afternoon guys. Tysons in Chicago seem like the ones you're focused on at the moment. I'm curious, more broadly, you had given us a bigger number for sort of development/redevelopment spend over the next five years. Where do you see that at this point, I guess, annually, or over a longer period of time, what are you expecting?

Arthur Coppola

Look over the five year period, I think the numbers that we've shared with you are roughly accurate. With the exception of the possibility of us building an outlet center in the Scottsdale market place in the next five years is probably out of those numbers now. The possibility of us opening and building a full price regional mall in the Goodyear market place is probably out of those numbers, at this point in time. So, right now, I think, it's best that we focus on exactly what we're in the ground on. We're in the ground with Tyson, we're in the ground with Chicago, it's likely that we will break ground on Niagara Falls next year.

In the long-term horizon, we're still working on that entitlement at Broadway Plaza in Walnut Creek. That's going along okay, but it's a difficult negotiation with the city, with lots of master planning implications. I think the opportunities are out there, still along the lines of the sizing that we have talked about, with the exception that when you take out the new possible mall in Phoenix, and Goodyear, the possibility of an outlet center in Scottsdale, that's a significant amount of money. That's $300 million or $400 million in that comes out, but it was pretty much back-ended anyway.

So, at this point in time, I think the real focus is on Chicago, Tysons, and the opportunity of Niagara Falls. We'll see how the others go. We're working on entitlements all the time. It's always hard when you're trying to project out five years, to know what's going to happen. Just because you see it in your sites when you talk about it, if market conditions change and all the sudden you've got overbuilding that is being created in a market like Phoenix. You got to back away for awhile, but right now we're really just focused on the three we talked about here. With the next big one coming after that being Walnut Creek. We've still got a lot of work to do on Walnut Creek.

Rich Moore - RBC Capital Markets

Okay. All right. Thank you, that's very helpful. You know, looking for a moment at the mall business itself, how do you guys size up traffic trends, maybe more recently, even since the end of the quarter? Given that the economy has slowed a bit, here.

Arthur Coppola

Are you talking about foot traffic, or sales?

Rich Moore - RBC Capital Markets

Yeah, foot traffic, at the malls.

Arthur Coppola

It's about the same. We don't have traffic counters at all of our malls. Sales are up, and some people, on a global basis, people prognosticate that sometimes purchases per visit or [inaudible] would infer that traffic was up. Look, the malls that we own, they feel busy, they look busy, they are busy, they're productive. Foot traffic is very important, but it's hard to have a direct correlation between foot traffic and sales. I think on a macro basis, people are continually more stretched for time, and they probably tend to go to places less often, and consolidate their visits when they do go, but it varies. Every property is different. Take the traffic at the Santa Monaco place, and you can just observe that it's virtually grid-locked, in terms of the number of bodies that we move through there. The big number, the eating the paste in the pudding there, and sales are great, sales are good. That's the most important thing.

Rich Moore - RBC Capital Markets

Okay, good. Thank you. Tom, last thing. Is North Park done? Is the refinancing of that done?

Thomas O’Hern

Rich, that's being handled by our partner, we're passive investor in there, and they're operating under a short-term extension now, and working with one of the existing lenders on that.

Rich Moore - RBC Capital Markets

Okay. So, probably next quarter, I'm guessing that's done. Right?

Thomas O’Hern

That's my assumption.

Rich Moore - RBC Capital Markets

Okay. All right, good. Thanks.

Operator

Moving on to Michael Mueller, with JP Morgan.

Michael Mueller – JP Morgan

Yeah, hi. I heard the comments about not knowing all the specific time-frames, but, if you think about Broadway, with everything really lined up and it goes according to plan, under the best scenario. What could a rough time-frame look like for that project?

Arthur Coppola

I think we talked about the grand-reopening being in 2016.

Michael Mueller – JPMorgan

Okay, okay.

Arthur Coppola

There are lots of things that, when we started a process, we had a certain comfort factor that the city was going to allow one level of development. Then, as they've gotten into it, they have decided that some of the public spaces that they thought they were willing to walk away from, they don't want to walk away from, so that's kind of caused us to rejigger the development. When we first started talking about the development, that's another one that in a previous call that I had said that we're thinking about the possibility of allowing residential to be built on top of the retail. As we've gotten into the process of the city, and we looked at it, we just decided that we're not going to incorporate residential into that. It's going to be a pure retail expansion. So, things are moving around.

That's a project that we're getting paid on our land, through the rents that we give today, while we work on the opportunity to build something that's a lot better. So, it's kind of the best of both worlds. Sometimes when you look on a piece of land, you're not getting paid while you're thinking about what to build. Here you have a situation where, as we think about what to build, we've got increasing sales, we've got increasing NOI. Once we get our entitlements in order for this project to pencil out, we'll have to convince ourselves that the incremental spend is worth decommissioning and then rebuilding. Preliminary numbers say that we have a huge NAV creation possibility here, and that we have the opportunity to create one of the top centers in the United States.

It's tremendously well anchored today, with a fabulous Nordstrom's, a fabulous new Neiman-Marcus. We've got a big Macy's that just wants to get bigger, and wants to become one of the standout Macy's in the marketplace. We've got specialty retailers that are lined up around the block that want to be there. So that's one that we're very patient, but we're actually getting paid for our patience. Then when we decide to pull the trigger, then the whole process is roughly 24 to 30 months. We think it could happen in the Fall of 2016. Frankly, it doesn't matter if it's '15 or '16, because we're getting paid to think about it.

Michael Mueller – JPMorgan

Okay. Separately, and a little bit more of a technical question. When we're thinking about Chicago leasing, how do the leases for that project with the tenants compare to say a normal traditional regional mall lease? If we're thinking about lease terms, the escalators, are they comparable?

Arthur Coppola

Yes.

Michael Mueller – JPMorgan

Okay. Then, last question, sticking with leasing. Any sort of update you can give us, on the Santa Monica, you're starting to turn some of the leases there. What's happening, in terms of the renewal rates versus prior rates?

Arthur Coppola

I think I've mentioned on the previous call, every time we looked at quoting a renewal deal or replacement deal, to new tenants that are coming in. Like three people is replacing Sketchers, and we've got a couple of other new tenants that have come in. Lorna Jane has come in replaced [inaudible]. Lorna Jane is an athletic specialty retailer out of Australia, and it's kind of a first to market location for them. Roughly, on average, the new rents compared to the old rents on the tenants that are going away, they're always above, and in some cases they're double.

As I've indicated before, I think there's a big opportunity to increase the rent levels, as we recycle. We were leasing in the worst of times, so it's not unusual that that's the case. It's also not unusual that that's the case when you've got a really successful center, because the guys that want to come in, that are not there now, they already have the advantage of knowing what works. When they can see the volumes of peers that they have, and see the success, then, they can pencil out better sales projections for themselves, and afford to pay you better rent. When you're building a project from scratch, and you're used to having mediocre malls, it's still speculative. We thought it was going to be a big winner, we believed it was going to be a winner, turned out to be a big winner, but, it's still speculative. Until you open it, you don't know. The trend is good, solid. NOI growth there is good, we're very bullish on the future and only good things are going to happen there.

Michael Mueller – JPMorgan

Okay. Thanks.

Arthur Coppola

Thank you.

Operator

Moving on to Steve Sakwa, with ISI Group.

Steve Sakwa – ISI Group

Yeah, good afternoon. Tom, or Art, I was wondering if you would be able to, on a go forward basis, I know you used to have a table in the back, that kind of provided the development projects and the costs. As the pipeline begins to ramp up, I'm just wondering if you would be able to provide a little more detail on that CIP number, which I think stands at about $350 million, today. Would you be able to kind of just go through, and talking about some of the projects that you've mentioned, whether it's Tysons, Niagara, Chicago, maybe Broadway and some others. Could you help us just bucket how much you've spent to date on each of those assets?

Arthur Coppola

Steve, we include a lot of assets in there, but the bulk of the CIP is Tysons, Chicago, and then Estrella Falls. It's not just ground up construction, it also includes a land relating to those projects. So that's the bulk of what's in there. There are other land holdings that are throughout the portfolio, in there, there are other smaller projects that are in there. That schedule you're referring to, is kind of a throwback to the era of '07 and '08, when we were scaling back on capital spending. I'm sure we can come up with something to give a little more detail to CIP as we go forward.

Steve Sakwa – ISI Group

Would you have [inaudible] for those three main projects, Tysons, Chicago, Estrella [inaudible].

Arthur Coppola

Not at my fingertips, Steve. I'll have to get back to you on that.

Thomas O’Hern

I think in my comments, Steve, I did indicate that over the course of the next year, our expected burn rate on Tysons, is $5 million a month, and we have a half interest in that. If you add our total expected projections, they won, including sub costs, interest carry and everything else on Tysons. From an equity viewpoint, and add up our total equity that we're going to put into Chicago, those two primarily. From beginning to end, the total investment probably is around $350 million. Our equity components are actually, [cheaper] though. Of that, probably we've got our pro-rata share to date is under $100 million, and the burn rate is what it is. The key variable being, which element that we decide to go vertical with, [inaudible] into Spring of next year.

Steve Sakwa – ISI Group

Okay. Could you maybe just elaborate a little more on Niagara? It sounded like you said you were nine months away from making a decision there. I guess, why is that taking so long, or what are the necessary approvals you need to make that decision?

Thomas O’Hern

The land that we're expanding on, is currently a trailer park, and we're de-leasing it. So it's taking a little time.

Steve Sakwa – ISI Group

Okay. Thank you.

Operator

The final question will come from Jeffrey Donnelly, with Wells Fargo.

Jeffrey Donnelly - Wells Fargo

Good afternoon, guys. A couple of questions. Art, has your partner given you a sense of how the rents that you're targeting at the office tower at Tysons, compares to the rents that perspective anchor tenants are paying today? I guess I'm wondering if there's a sense that maybe some of these tenants are maybe paying above market rent. From their perspective, any kind of incremental change might not be all that much of a stretch.

Arthur Coppola

Jeff, I don't know if you've got static on your end of the phone, but for some reason we do on our end. Hopefully, you can hear me. The market rents that we are seeking to achieve are roughly in line with the rents that are currently being achieved that the other letter considered to be trophy office buildings in the market place. We think that we've got the best product in the market place, so we're confident that we can get the rents that we need to achieve. Those rents are north of $50.00 a foot.

Jeffrey Donnelly - Wells Fargo

Hopefully you can hear me okay. Then, you mentioned the burn rate, I heard your share was $2 1/2 million a month. I guess, how long are you guys willing to carry, or are you preparing to carry that cost, before it becomes unpalatable?

Arthur Coppola

Oh, no, no. It's not going to be unpalatable. The only question would be, whether or not we continue full bore, in the Spring of next year, or we pause on one of the elements. We're very bullish about all three elements. I was really just outlining basically, how much money we will have invested, before we have to make the decision to go vertical or not.

Jeffrey Donnelly - Wells Fargo

Okay. Understood. Last question is just concerning your cash leasing spread. From where you guys sit today, on the mall side, do you expect to maintain a similar pace of growth, as we role into 2013? I know it can move around quarter to quarter, but just trying to think what you think you'll average going forward.

Thomas O’Hern

Well, if you look at what we've done in the past, Jeff, we've been fairly consistent between 10% and 20%. The numbers, we tend not to give a quarterly number, because you can get quite a bit of fluctuation; so the numbers we give on leasing are on the trailing 12 months. I would say as we see what rolls forward ahead of us, it's reasonable to expect to be between 10% to 20%.

Jeffrey Donnelly - Wells Fargo

Okay. That's fine. Thanks guys.

Thomas O'Hern

Thank you.

Arthur Coppola

All right. Thank you.

Operator

That does conclude the question and answer session. I'll now turn the conference back over to [you], for any additional or closing remarks.

Arthur Coppola

Thank you very much for joining us. We look forward to seeing you soon, and reporting to you on our progress. Thanks again, for joining us today.

Operator

Thank you. That does conclude today's conference. Thank you for your participation today.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Macerich Company's CEO Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts