The Macerich Company
Q2 2015 Earnings Call Transcript

Published: 24 Jul 2015

[Operator:]

Welcome to The Macerich Company Second Quarter 2015 Earnings Conference Call. 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 the conference over to Jean Wood, Vice President of Investor Relations. Please go ahead.

[Jean Wood:]

Thank you everyone for joining us today on our second quarter 2015 earnings call. During the course of this call, management will be making forward-looking statements, which are subject to uncertainties and risk associated with our business and industry. For a more detailed description of these risks, please refer to the company’s press release and SEC filings. 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. I also want to announce that Macerich will be hosting a property tour of Tysons Corner Center and the new mixed-use development on Thursday morning, October 1st. You have the opportunity to stay at the new Hyatt Regency Tysons Corner Center. We will be sending out a save-the-date with more details soon. Joining us today are Art Coppola, CEO and Chairman; 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’ll be limiting the call to one hour. If we run out of time and you still have questions, please do not hesitate to call me, John Perry, Jean Wood or Art. It was another very strong quarter for us. We are now really starting to see the benefit in our operating results from all the major portfolio transformations we have done over the past two years. This includes the sale of 15 malls and the redeployment of that capital into more productive faster-growing assets. Leasing spreads were good again this quarter and we saw strong yield volume on 335,000 square feet of shop spaces and the average deposit of re-leasing spread compared to the expiring rent was 17.5%. Mall occupancy was again very high at 95.5%, up 10 basis points from a year ago, as well as up 10 basis points sequentially from last quarter. Temporary occupancy remained relatively flat at 5.3%, up slightly from 5.2% at June 30 of ’14. In light of the very significant retail bankruptcies in the second half of last year and early ‘15 this are very good occupancy results. Average mall store base rents increased to $53.62 that was up 9% from a year ago. Looking at FFO for the quarter we reported this morning FFO at $0.89 per share that compared to $0.86 in the second quarter of 2014. Reflected in was $1.6 million loss on extinguishment of debt, as well as $11.4 million of expense related to an unsolicited takeover attempt and contested proxy, together they makeup $0.08 a share. Excluding those two items FFO was $0.97 per share for the quarter ahead of both our guidance range and consensus estimates. Same center NOI during the quarter increased 7.5% compared to the second quarter of last year and year-to-date same center NOI growth is up 6.29%. This increase was driven by increased occupancy, double-digit re-leasing spreads, annual rate increases and an aggressive operating cost management program put into place this year. The results through midyear have lead us to increase our same center guidance range assumption up 100 basis points to 5.5% to 6% for the full year. As a result of the increase in same center NOI, we saw nice lift in the gross operating margin. Our gross margin increased to 69.8%, up from 67% from the second quarter of 2014. Bad dept expense for the quarter was $2 million, slightly higher than last year in the second quarter where we incurred $1.7 million of bad debt expense. During the quarter the average interest rate was down to 3.47% compared to 4.11% a year ago, and if you look at the other balance sheet metrics, debt-to-market cap at quarter end was 36.9%, we had a very healthy interest coverage ratio of 3.7 times. Debt-to-EBITDA on a forward basis was 7.2 and average debt maturity of 5.5 years. And the financing market continues to be strong and we will continue to be in that market with the number of high quality assets that have been unencumbered recently and our candidates for long-term fixed rate financing. They include Fresno Fashion Fair, South Plains Mall, Inland Center, as well as 29th Street in Boulder. In today's press release we -- as a result of the strong first half results and outlook for the balance of the year, we bumped and narrowed our FFO guidance range. We increased to $3.86 to $3.94 and that’s up from the prior guidance of $3.83 to $3.93 per share. Looking at tenant sales, a good quarter there as well, the portfolio mall tenant sales per foot were up 10% to $623 a foot for the year ended June 30, 2015, that compared to $567 for the year ended June 30, 2014. On a same center basis sales per foot were $619 and that compared up 6.5% to $581 at June 30, 2014. Again, during the period Arizona and California were top regions for us in terms of sales growth. At this point, I would like to turn it over to Bob Perlmutter to discuss the leasing environment.

[Robert Perlmutter:]

Thanks, Tom. As Tom indicated the second quarter leasing metrics were good. Leasing spreads for the trailing 12 months were up 17.5, occupancy rose by 10 basis points to 95.5%, sales reached $623 a foot. Bankruptcies moderated significantly from the previous quarter and our signed leases for tenants over 10,000 square feet was strong with over 450,000 square feet signed during the quarter including three locations with H&M. Demand from retailers for the company’s mall locations and outlet venues continues to be positive. We see retailers seeking to tie in multi-channel retail opportunities and further establish their brand identity. In addition we see emerging brand and foreign retailers entering the U.S. through store locations, which are typically on the East and West Coast and that aligns with our portfolio. Tenant bankruptcies during the first quarter provide a significant headwind with eight national retailers declaring bankruptcies. These tenants affected 76 stores containing approximately 247,000 square feet, which generated sales of only $241 per square foot. Included were larger chain such as RadioShack, Wet Seal, and Cache. Some of this impact has been mitigated with approximately 46% of the space either leased or approved and in lease documentation. We have seen and expect to continue to see some retailers with larger store fleets reduce their store count. This is illustrated by Gap’s recent announcement to close 175 stores. Most of these store closures are effectuated through natural lease expiration as oppose to lease buyouts. We continue to believe the quality of the company's portfolio reduces the impact from both bankruptcies and store closures, which we believe will be felt disproportionately in the lower quality centers. Leasing progress continues to be made at Broadway Plaza located in Walnut Creek, California. The initial portion of the first phase will open this November with 22 spaces containing 45,000 square feet. We currently have leases executed for 20 of the spaces or 91%. The remaining two spaces we expect to sign leases shortly. Some of the tenants will be part of the initial phase and new to the include Lululemon, KIT&ACE, Michael Kors, Madewell, Kiehls, Lou & Grey, Athleta and Vince Camuto. The balance of the first phase will open in May 16 and contain approximately 150,000 square feet. We expect to make a more detailed announcement on the tendency later this year. Significant resources are also been applied to improving the quality and revenue generation from the common areas of the shopping center. Sources of revenues include permanent kiosks and seasonal carts, as well as advertising and sponsorship. As the portfolio has migrated to fewer but more dominant centers, these opportunities will grow and will result in improved operating margins. Through the second quarter the number of deals approved has doubled as compared to the previous year. The majority of this impact will be felt in 2016 when the lease is annualize. An example of this has been the conversion from stationary guest service kiosk into mobile concierges, including text responses to customer’s inquiries. This has not only improved the customer service, the customer experience, but has also allowed us to convert the former guest kiosk which are often the best locations within the shopping center into rent paying retailers. Another example of this is the Santa Monica Place, where the new ArcLight Theater will present significant advertising opportunities for major motion picture releases. Lastly, to comment on sales, year-to-date sales through the second quarter have reached $623 per square foot. The increase is attributed to a couple of factors, including the improvement in many of the key tenant sales, including people like Sephora, American Eagle, Foot Locker, VICTORIA'S SECRET, secondly, to the impact of high volume retailers like Apple and Tesla, third, the closure of low-volume stores such as RadioShack, Wet Seal, and Cache. And finally the disposition of lower productivity centers. In summary, we believe our portfolio offers retailers with key locations in major markets that serve dense trade areas. These opportunities will increase in importance to omnichannel retailers that have either existing store fleets or are attempting to build store bases. And with that, I would turn it over to Art.

[Art Coppola:]

Thank you, Bob and thank you, Tom. We’re very pleased with our operating results and with all of our metrics that we have put up here for the first six months. And as you can see by our guidance adjustment, we’re very bullish about our future, mid-term as well as longer term outlook. Same-center NOI is significantly above the guidance, even the high end of the guidance range that we provided at the beginning of year. And one might ask, what is the new normal as I look at it. Tom mentioned that he sees total same-center NOI of around 6% on the portfolio this year. And we’re not in a position yet to give guidance for 2016 and ‘17. But we internally are expecting to see same-center NOI growth in that same range of 6% over the next couple of years or so. And that’s largely been put into place as a consequence of re-leasing activity, consequence of the margin improvement, some of which are yet to come, particularly on the revenue side. But we are very, very bullish on our ability to improve our margins. It was asked, I know, by one analyst, well have your really changed your business practices on the expense side to increase your margins. And the answer is really no. We are fortunate enough this year to have a couple of major portfolio contracts for maintenance security for example, come up for renewal and given the strength of our portfolio and the quality of the assets and the size of the assets, we’re able to negotiate significant reductions there as well as in other areas. So we’re very pleased about all of our operating metrics and the performance of the company and the outlook for the future on the leasing side. On the development side, Bob and Tom both touched on a couple of projects that are very meaningful to us. Very happy with where we are in Broadway Plaza, at Tysons Corner, you are invited to a tour that’s coming up here in the near future. Residential Tower is now taking move-ins. It is currently well at least above schedule. It’s currently 33% leased that we anticipated being fully leased by this time next year. As we look at other major projects that are underway, Scottsdale Fashion Square, the Dick’s Sporting Goods anchor recently opened. They are doing very well. Harkins opens up later this year, same combination of additional anchors are going to be opening up later this year at Cerritos and early next year at Cerritos. Very pleased with the impact. But the announcement in the construction and the reality of the ArcLight Cinema that’s had on the third level of Santa Monica Place, which has actually also helped us to lend a signature restaurant that will be coming through the third level of Santa Monica Place and we expect it will generate tremendous amount of traffic. At Green Acres, the leasing on Green Acre Commons, the contiguous space that we are building on the land that we acquired there is coming along extremely well. Preleasing activity both at Fashion Outlets in Philadelphia at the Gallery at Market East, coming along well as is San Francisco. Last earnings call, we’re on the heels of just announcing our joint venture with Sears on nine assets. We have been meeting with Sears and the Seritage people. We’re very pleased to have the opportunity to redevelop it, to reposition those line assets. And we anticipate over the next 60 to 90 days that we’ll be in position to make more concrete announcements about what’s happening within the Sears’ portfolio with us and the rationalization but very happy with where we sit there. And in particular, we could be seeing pretty significant reconfigurations and remerchandising and developments available to us at Cerritos and Washington Square in particular, both great centers and centers where we have the ability to recapture over 200,000 square feet from Sears and each of them Sears controls at 28-acre parcel of land there. We’re looking at various ideas for various expansions. So very bullish on where we are, pleased with our results year-to-date. And at this point, we’d like to open it up for Q&A.

[Operator:]

Thank you. [Operator Instructions] We’ll take our first question from Craig Schmidt with Bank of America. Art Coppola Hello Craig. Craig Schmidt …. positions to fit into recycling capital. I just wonder how that was lining up for the second half of 2015? Art Coppola Craig, we really heard half of that question. Could you give us the whole question again? Craig Schmidt Sorry. Of course. I know that you're looking toward dispositions for recycling capital and I just wonder how that was lining up for the second half of this year? Art Coppola We are definitely in conversations to monetize our interest in several assets. I anticipate that over the next 30 to 60 days, we’ll be in a position to provide more color on it. It will predominantly take the form of some new joint ventures on existing assets and the profile of the assets that are being looked, is really a very broad cross section of the company that if you take for example, one metrics, which would be sales per foot are virtually identical to the overall performance of the company as a whole. So the pool of assets that we are looking at, includes one asset that’s in our top 10, two assets that are in our group of 11 through 20, a couple of assets that are in a group of 21 through 30 as well as couple of assets that are in group of 31 to 40. So it’s a broad cross section. We’re -- let's say sixth or seventh inning of conversations. We’re very gratified that the initial value indications that these institutional investors would be taking minority noncontrol positions, not only validate the boards opinion of value of the company that they reached with the assistance of its advisors back in March but actually exceed those numbers. And we’re looking forward to being able to announce the results of that asset monetization activity over the next 30 to 60 days. As we mentioned in previous calls, we will use those proceeds for whatever we determine at the time is the most appropriate use of proceeds, certainly redeploying the capital either to fund our development expansion pipeline or essentially prefunded to something that is always value accretive and always make sense. But we have also mentioned in previous calls that particularly at today’s share prices, that the idea of using proceeds from the sale of assets at what we deem to be fair value through joint ventures and using those proceeds to repurchase shares at prices that we think are substantial for this account for the fair value of the company, makes all the sense in the world and as we get more clarity on the disposition and joint venture program, we’ll be announcing the size and all of the pricing as well as these proceeds. And you can expect that will happen over the next 60 days. Craig Schmidt Okay, and then just, you touched on this briefly, but how soon do you think you can start capturing the 50% of space in your nine stores with the Sears joint venture? Art Coppola We have the right to recapture the 50% space today and we’re just working closely with Sears as well as perspective users to come up with the right remerchandising plan at the various centers. So there will be a lot more clarity on that, that will be provided over the next 90 days. But it will be an ongoing process. In the meantime, we’re getting paid over a very reasonable return on our investment, north of 6% while we’re taking a look at and weighing the best alternatives for the reconfiguration and remerchandising of those locations.

[Operator:]

And we’ll take our next question from Alexander Goldfarb with Sandler O'Neill. Art Coppola Hello. Alexander Goldfarb Hey Art. How are you? The first question is on the margin improvement and, Tom, just thinking about the outlook for the balance of the year. You guys made meaningful progress from first to second quarter. Should we interpret that there will be more dramatic improvements in the back half of the year or are there some offsets that are coming up that would -- some negatives from just whatever is in the numbers that would cause the back half to be -- to have a little bit of a headwind? Because it seems like you guys are running a bit ahead of your increased guidance, so just didn't know, one, how to temper our view for margin improvement and two, if there were any offsets that we should think about in the back half of the year? Tom O'Hern Yeah. As it relates to the margin, the things that hit very quickly were some of the expense efficiencies that Art mentioned that we picked up and could be implemented very, very quickly. The revenue side of the improvement takes a little bit longer. It has to go through generally the leasing process, which takes a little bit time. So, I think the second half may not be as quick as the first half in terms of picking up the improvement. When we set out to improve the margins, Art indicated that over the next two years we’d probably see 400 basis points of improvement. And to date through the second quarter, we are closer to 260 or 270 basis points through two quarter. So the expense I came on quicker, I would expect the balance of that to move a little slower. Second half of the year, we do have a little bit more variability and things like percentage rents and things like that, which are somewhat of an estimate and tend to be more backend weighted. We have seen a little bit higher than average bad debt expense this year as a result of many of the bankruptcies that Bob mentioned in his comments. So there is little bit of that and that creates a little bit of uncertainty in the second half as well. We expect to be, obviously a good second half regarding two of same center range of 5.5% to 6% and that’s up fairly significantly from our initial guidance for the year, which was 4.25% to 4.75%, that’s a 150 basis point pick up. As we sit here today, the bias is probably to the high side of that range we just gave but obviously less than the second quarter. Alexander Goldfarb Okay. And then as a follow-up to that, are there any more advisory or takeover proxy costs or has everything now been fully expensed, meaning should we expect anything more later this year or everything has now been expensed relating to the proxy and the solicitation? Tom O'Hern To my knowledge, everything has been expensed meeting as of the end of the second quarter.

[Operator:]

And we will take our next question from Michael Mueller with J.P. Morgan. Michael Mueller Yeah. Hi. I guess following up on that prior question. It looks like the recoveries jumped a little bit in the quarter. They popped some. And I was wondering, can you talk a little bit about what drove that? And specifically what drove the 100 basis points of increase in the same-store guidance? Tom O'Hern The recoveries on a same-center basis didn’t really go up at that level. I think what you are seeing if you are comparing it to the second quarter of last year, as we consolidated four fairly large assets that have been unconsolidated asset before that. And the reason the recovery rate went up is because we were able to make some expense cuts to recoverable areas like operations, maintenance, security things like that. So that's going to cause the recovery rate to go up. And obviously we had two pretty good quarters as it relates to same-center NOI growth. We are coming in at 6.2% for the year. It gives us a little bit more confidence at the balance of the year we are going to be in that new range that we published of 5.5% to 6% on average. So that's what gave us the confidence to increase the guidance for the second half of the year. Michael Mueller Okay. Great. And then for the second question, just thinking in terms of the earnings guidance increase, were there any offsetting factors that kind of went against the higher same-store NOI guidance? Tom O'Hern Yeah. We’ve got a slightly higher bad debt expense for example, which I alluded to in a minute ago that’s been bumped. We also tightened the range little bit. So, we took out little bit of uncertainty out of that as well. I mean, we bumped this now $0.05 from our initial guidance, which is roughly equivalent to the improvement in the same-center NOI that we’ve changed. Michael Mueller Okay. Great. Thank you.

[Operator:]

Todd Tom is next with KeyBanc Capital Markets. Art Coppola Hi, Todd. Todd Tom Hi. Good afternoon. Just a follow-up on the guidance revision. I just wanted to dig in a little bit there. Can you just discuss why the guidance was actually up $0.02 at the midpoint? The increase in same-store NOI growth, I guess, for the full year alone is more than $0.02 a share, plus you added the Sears JV to the forecast, so you mentioned the bad debt expense. That's a little higher, but that doesn't sound like it is as significant. I am just trying to understand what the offset might have been. Art Coppola Well, Todd, 150 basis point improvements in same-center NOI is about $0.06 of improvement. We picked part of that up last quarter because we bumped last quarter as well and we also bumped the same-center range last quarter. We picked up another $0.02 share, so we are halfway through the year. We’ve got decent visibility for the rest of the year, but more than 50% of our revenues in NOI comes in the second half, particularly in the fourth quarter where you’ve got a lot of temporary leasing and you've also got the percentage rent, the bulk of the percentage rent gets booked. So there is some uncertainty in those numbers. We are comfortable bumping it and narrowing the range and we will readdress it again after next quarter. Todd Tom Okay. And then the management company loss was lower sequentially by almost $7 million. I think that is consistent largely with what -- I think you mentioned last quarter, Tom, the bonus payments and some other items that hit in the first quarter. Are this revenue and expenses for the management company's operations, is that a fairly good run rate to think about throughout the balance of the year? Art Coppola Second quarter is a good run rate. As you mentioned, there were some non-recurring things in the first quarter that made that usually high in terms of expenses. Todd Tom Okay. All right. Thank you.

[Tom O'Hern:]

Thank you.

[Operator:]

And from Citibank, we have Christy McElroy. Please go ahead. Christy McElroy Hi. Good afternoon, guys. Art Coppola Hey, Christy. Christy McElroy Just following up on the potential asset sales, as you think about sort of the sources and uses of capital, are stock buybacks contingent on executing on asset sales? And what level of proceeds should we be thinking about, given everything that you have in the works today? Art Coppola We think that from our viewpoint, funding a stock buyback with equity that comes from either the disposition of all of an asset, or the disposition of a part of an asset through joint venture is the most logical source of capital. We overly believe in the idea of borrowing money to buyback stocks. So once the joint ventures are committed and allocated and legally under contract, that would be the time that we would anticipate that if there is going to be a stock buyback, which I think there is a strong probability, that’s going to be -- make a lot of sense to us. That would be the time that we would think about such a thing. We are looking at a range of different joint ventures, but the idea that we would generate, at least a $1.5 billion or maybe even $2 billion of new cash from the joint venture activities that could be used for whatever we deem at that point of time to be the most rational use of proceeds is certainly not out of question. So it’s a meaningful asset monetization, a very meaningful validation of our view on the value of our assets. Again, it’s a very broad cross question of assets. And we are not legally committed to the joint ventures at this point in time. So it wouldn’t be appropriate in our mind to address or consider implementing a stock buyback until we have the certainty of legal commitments from the investors. Christy McElroy Okay. And then just to follow-up on the same-store NOI forecast. Given the increase in your 2015 same-store forecast, I'm just thinking about your prior 2016 total NOI forecast of $1.04 billion, given the increase in your expectations for 2015, how that’s changed?

[Tom O'Hern:]

We haven’t given any additional guidance on 2016 yet, Christy. It would be premature to do that at this point. Christy McElroy So no update on that $1.04 billion number?

[Tom O'Hern:]

No. Christy McElroy Thank you.

[Operator:]

And we will take our next question from Steve Sakwa with Evercore ISI. Steve Sakwa Thanks. Art, I just wanted to see if you could talk a little bit…. Art Coppola Hey Steve. Steve Sakwa Hi. If you could talk about the redevelopment program and expansions, and just as you look out over the next 12 to 24 months, what other projects and if you can frame out for us kind of size and scope for some of those things. Art Coppola I’m not in a position to make any incremental announcements that are not in our supplement of filing right now. But clearly, there are opportunities within the nine joint ventures that we have with Seritage for some incremental investment opportunities there. We are constantly looking at many different expansion and redevelopment scenarios at quite a few of our properties. And our policy is that when we believe that we have a clear vision that it makes it into the shadow pipeline and when we believe that we have all of our entitlements and that we are virtually ready to break ground, it makes it into the in-process pipeline. So, I’m not going to at this point speculate beyond what’s in our supplemental disclosure. But there are plenty of projects that are being reviewed, that are not in the supplemental disclosure and as they pass those hurdles of projects that we want to pursue, they will be disclosed. So there is definitely more to come, definitely more to come. Steve Sakwa Okay. And then, I guess, just on the outlet business. I don’t -- maybe you can't speak to this either. But just sort of in terms of potential new projects as you just kind of look around the country, I mean how many more do you think you could do over the next couple of years? Art Coppola Our focus right now is on the execution of our project at San Francisco and Philadelphia. We’ve got a lot of wood to cut there, but we are very bullish on each of them. So those are definitely in the pipeline. And beyond that, I would say the pool is limited. It would be from a competitive disadvantage in our view for us to put a number on something, but it’s a limited pool. We’ve always said that if we at the end of the day own 3, 4, 5, 6, 7, 8 of these after 5 or 7 years of being in that business, given our requirements that they would be dominant centers that we think that would be a great accomplishment. And so I would not forecast that we’re going to be announcing any new wins anytime soon other than those that are currently in our disclosure. And those are both great projects and we are very happy to have those opportunities. I did allude to the possibility in a previous call that we could be potentially looking at an expansion of Chicago, the Fashion Outlets of Chicago somewhere down the road, but that’s speculative at this point in time, and it’s still possible but speculative. Steve Sakwa Okay. Thank you. Art Coppola Thank you.

[Operator:]

And from Deutsche Bank, we have Vincent Chao. Please go ahead, sir. Vincent Chao Hi. Good afternoon, everyone. Just wondering if you could maybe provide some more color on the sales trends that you are seeing, which seem to be accelerating, the tenant sales growth in your portfolio. It seems to be a little bit at the odds with some of the macro sales data we see, which is sort of slowing. But just wondering if maybe you could provide some color on sort of categories you are seeing the most strength from and also maybe more recent trends from the quarter as opposed to on a trailing 12-month basis.

[Robert Perlmutter:]

Well, I think from a category standpoint, some of the stronger categories have been home furnishings, jewelry, athletic apparel, and athletic footwear, those would be some of the strongest. Regionally, the West Coast and Arizona has led the sales increases. As I mentioned, what we see principally in terms of sales growth is many of our core tenants that occupy space in almost everyone of our centers, I think I mentioned some like Sephora and Victoria's Secret and Foot Locker, they have had very good sales trends. Kay Jewelers is another one that had good sales trends. And then you do have the impact of the unique high volume retailers like Apple and Tesla. I think the weakest part of the market has been the apparel, and that is important for the malls because they do occupy a significant portion of the mall space. And that’s probably been the softest part of the market. Art Coppola And just to follow on to that, you could easily have a macro environment where ICSC or whatever other resource that tracks retail sales, they could come out and say, hey, retail sales were flat every quarter for the next three years and they wouldn’t be out of the question that even in that environment, you would see strong sales increases within a portfolio of well located regional malls. So the source of that is essentially what we do everyday which is constantly on the lookout and for opportunities to replace lower producing tenants with higher producing tenants. And that’s a big driver of sales performance increases in a well located mall portfolio. Vincent Chao Okay. Thanks. And just as a follow-up, and that last comment sort of maybe addresses this question as well. But just trying to understand, so the rising sales growth environment seems to suggest an improving environment for the retailers in your malls, but the bad debt expenses is going up. So maybe that's just part of that churning process, but curious if you had some comments on that. Tom O’Hern Yes. That is churning. And when you look at some of the retailers that filed bankruptcy and went out, those were some fairly stale concepts. I don’t think it was a surprise to anybody to see RadioShack file and close stores in the same way with Wet Seal. They have been through the process a number of times. So it’s kind of out with the old tired concepts and in with the new concepts, which by the way the new concepts are taking a lot more space than the failed concepts are giving back. Art Coppola Bad debts from dying concepts is really a positive canary in the coal mine of good things to come, because it’s a precursor of the replacement of tenants that are doing well below the mall average with tenants that are doing. We always seek to bring in new tenants that will do better than the mall average. But even if you bring in tenants that are doing the mall average, you are going to increase the overall sales of the portfolio. So sales of bad debt from low producing tenants, which that’s what we are looking at here and it’s almost always what you’re are looking at, is really a precursor of good things to come in a well located mall portfolio, which is what we own. Vincent Chao Okay. Thank you. Art Coppola Thank you.

[Operator:]

And next, we will take Paul Morgan with Canaccord Genuity. Please go ahead, sir. Paul Morgan Hi, good afternoon. Art Coppola Hello, Paul. Paul Morgan The same-store line numbers that you gave, is one way to think of it that, as we look into the rest of this year, it’s been largely an expense story in terms of some of the initiatives you talked about earlier? And then, as you said, you can do 6%, you think, maybe in 2016 and 2017 as well. As the expense savings anniversary, would we -- to get to that number going forward, is that when kind of revenue initiatives will start to kick in? Is that one way to look at it? Tom O’Hern Well, that’s certainly part of it. I mean, if you look at this quarter, I would say this quarter for a second, we had about $4 million of savings on the expense side on the same-center basis. So that equates to about a 180 basis points or so on the same-center numbers. So that brings you down into the 5% range, which is a healthy growth rate. And that’s before some of these new assumptions coming on the leasing side and other ancillary income. So if you look at this quarter, you can certainly see the impact of the expenses, but that still leaves us at a fairly high level of same-center NOI and that’s before some of these new initiatives kick in. Paul Morgan Okay. And then my other question, just in terms of the joint venture, so, I mean, could you just help give some color -- I mean you have talked about over the past you pursue the advantages of buying out JV partners in some of your top assets. And this is kind of -- this would seem to be going the other way. Obviously, the buyback is a potentially strong use of proceeds, but is that just it, to provide a data point evaluation and potentially buy back the stock? Or are there other reasons? Art Coppola Well, there is certainly any of the new or expansion of existing relationships or the addition of new partners. We are clearly having strategic conversations with them and seeking to do business with people that see the world the way we see the world. Coming out of say March, we had a tremendous amount of interaction with our shareholder base. And our shareholder base really communicated to us that the only way that they felt that we’re going to -- that they’re going to be able to update their thinking to be more in line with our thinking in terms of the NAV of the company was to monetize some assets. If there were not such a large discrepancy between what we perceived the value of the companies would be and where it is currently trading, our appetite should pursue those monetizations would be diminished a little bit. But given the current very large discrepancy between where our stock is trading and where we see the value of our company, and in response to really a request from our shareholders that of kind of show me the money request, that’s why we have pursued the monetization and we think we have very, very attractive use of proceeds. So we are not doing it for optics only, we just think it makes all the sense in the world. And we are clearly not taking the cream of the crop and using that to then average down in terms of the quality of the company. We are taking a very broad cross-section of quality that’s representative of the company overall. And we are convinced that when we announced that deal, when we announced the valuations attendant to that deal, it will give people a lot more visibility and confidence into our view of the value of our assets and help them to update their own thinking. And again, at this point in time compared to a few months ago is that we have a really attractive use of proceeds. Paul Morgan So you are structuring it intentionally so that the portfolio sort of reflects -- is reflective of the quality of the rest of your portfolio? Art Coppola Yes. We don’t wanted to look like -- we don’t want people to be able to look at it and say well that’s not really much of a litmus because I will use an extreme example. You did joint ventures on your top three assets in the company and you did it a sub 4 cap rate and they will say of course it’s worth of sub 4 cap rate, but does it mean for everything else. So we really decided that look we would take a very broad cross-section of assets that are really -- when you take a look and if you are going to use sales per foot as the measure to compare that pool of assets to the company, the sales per foot of the asset that we’re looking at doing these joint ventures on is extremely similar to our average sales per foot that’s in place for the company as a whole today. And I mentioned in my opening comments where the assets sat, given the way that we rank our properties. You can see that it is a broad cross-section that hopefully will give people and it’s a sizeable cross-section in terms of dollars. It will give people hopefully an updated data point, which is really one of the challenges that the mall industry has is that you have very few data points to look at for people to stay up-to-date on where the private market is valuing these assets. And even with these joint ventures for example, you’re still not getting a true sense of the value. It’s still less than the true value because it’s a minority position that has no control and the control position or 100% position of a great mall would always trade for more than what a minority position we trade for. Paul Morgan Great. Thanks. Art Coppola Okay. Thank you.

[Operator:]

And we have Rich Moore with RBC Capital Markets next. Please go ahead. Art Coppola Good afternoon, Rich. Rich Moore Yes. Hi, Art. Good afternoon, guys. The first thing is the line of credit, Tom has a balance of $767 million, I think that’s down from $852 million last quarter, but you added the Lakewood mortgage, so that should have shaved some $400 million. And I look at that now that $767 million and I’d say, are you going to be able to reduce that further? Is that part of the user proceeds from the joint venture sale and that kind of thing? Or are we going to run more in the $700 million range going forward? Art Coppola Yes. Rich, you may have missed this. I made a comment early in my comments that we currently have four pretty significant unencumbered assets, Fresno Fashion Fair, South Plains, Inland, Twenty Ninth Street for example and there is others, but those alone are $800 million of refinancing proceeds at a comfortable 50% or so LTV. And the anticipation is that we will gradually as market conditions allow finance those and that capital can be used to pay down the line of credit. We really don’t have a lot of floating rate debt on the books, so we haven’t been a huge hurry, but that’s financing out there in Fresno. We’ve been in the market getting bids and others would finance out pretty quickly, particularly in the CMBS market. So that’s the plan there, at least at the moment. Rich Moore Okay. So, just as those mortgages come due, you’ll get higher user proceeds, higher proceeds and pay down some of the line? Art Coppola Right. Rich Moore Okay. And then the other thing is other income guys, was also up pretty strongly this quarter and I'm curious, I am thinking about it sequentially. And I'm wondering if that sort of trend continues as well and is some part of the sustained margin improvement. Art Coppola Well, we certainly hope so, Rich. I mean that tends to be parking revenues, advertising revenues, things like that and was up a bit and that’s a goal is to continue to push those type of answer that revenue will drop right to the bottomline and improve the margin. Rich Moore Okay. So those could continue as well? Art Coppola We certainly plan on that. Rich Moore Great. Okay. Thank you, guys. Art Coppola Thanks, Rich. Tom O'Hern Thanks.

[Operator:]

And from Jefferies we have Tayo Okusanya. Please go ahead. Tayo Okusanya Hi. Yes. Good afternoon, everyone. Great quarter and really nice to see. Just I may have missed this earlier on, but was there any more update on Candlestick and The Gallery in particular? Art Coppola Just made some general comments that pre-leasing activity is going on very well and we’re very bullish on both of them. Tayo Okusanya On both of the projects. Okay. Great. Thank you. Art Coppola Thank you.

[Operator:]

And we’ll take our next question from Haendel St. Juste, Morgan Stanley. Haendel St. Juste Hey there. A - Art Coppola Good afternoon. Haendel St. Juste How are you guys doing? So, Art, a question for you, I guess, at our recent NAREIT Meeting, you mentioned that you've resumed marketing your bottom 10 or so lower-tier malls. So I wanted to clarify, first, that those malls were separate from the JV conversation or JV comments you were making earlier. And as part of that, can you give us a sense of the status of that sales process, and any color on pricing or any other detail you would be comfortable to provide if? Art Coppola Yeah. We did get a lot of inward increase about those assets, but unfortunately a lot of those buyers are essentially trying to, instead of just making money, they’re trying to improve their optics and so they’re trying to cherry pick things. And I still see as over the next five years not owning our bottom 10 assets. But over the next six months, my suspicion is that we might sell one of them and we’ll see where that goes. The pricing on that particular deal is, I think, in the low 60s or somewhere down in terms of cap rate but we’ll see. Haendel St. Juste Okay. Fair enough. And I guess … Art Coppola And a very high, Haendel, just to clarify a little bit. Look, we have an appetite to give people clarity on the value of the company and in our view, if we can sale a joint venture interest at a higher multiple than you can buyback stock that’s kind of a no-brainer. And it’s a very appropriate use of capital, especially if it’s a broad cross section. And we have absolute certainty and confidence that we will execute on the joint venture side. Dispositions by their very nature, I’m just being agnostic and I believe them when they close. Otherwise, I just don’t even try and predict. So, we really decided that while that is the source of capital for us, it really only represents 5% or 6% of our NOI. So it really doesn’t give you any guidance to the value of the company, if we sold all 10 of them. And given that our portfolio transformation is really already complete with 95% of our NOI coming from fortress assets, there is no compelling reason to do it there either. The whole idea of the reverse leverage where some of your weaker centers hurt your better centers is behind us now and our better centers are no longer being homogenized down which can tend to happen. And that’s one of the reason that you continue to see this double-digit releasing spreads that we have been reporting to you. So, that’s kind of been the thinking. Haendel St. Juste Okay. Listen, I certainly appreciate the additional color there, and as well as the thought process on the JVs and the expectation of higher values. But have you thought of, or perhaps how would you respond to those who might view this potentially as a potential form of a takeover defense? Curious on how that sort of went into your thought process here on the JVs. Art Coppola Well, I’ve always maintained that the best defense against the takeover is to outperform your peers. And as it falls into the bucket of giving us the ability to outperform folks, well, I guess you could call it that but it’s just good business. So, a good business is considered to be a deterrent to somebody wanting to buy your company then you could consider that. It’s just good business.

[Operator:]

And we’ll take our next question from Ki Bin Kim with SunTrust. Ki Bin Kim Thank you. Art Coppola Hello. Ki Bin Kim Hi. How you guys going. So, I realize value is a lot of times in reses in the eye of the beholder and even consensus estimates for NAV are somewhat all over the place. But I am just a little surprised that you are intending to do a stock buyback, and I understand if you're going to sell assets at $623 of sales productivity at a lower cap rate and buyback stock. I understand that math. But when I look at consensus NAV or even my NAV, as I say, consensus is at $78. And some of those estimates include a quasi takeout premium. It just doesn't seem like the best use of capital, maybe not a bad use of capital, but maybe not the best thing to do, especially with your development pipeline that is pretty big and you have a serious joint venture to fund. So just curious to know, maybe it comes down to what your NAV is versus what I think your NAV is, but why buyback stock? And why is that a top two or three best uses of capital? Art Coppola We haven’t announced that, that’s what we’re doing but we clearly have indicated to you that it’s on the table. And we’ve given you a timeframe that you could expect that it could be announced. As to -- if we believe that our NAV with $78 of share, this company would no longer be in existence, it would have been sold, we clearly don’t believe that. And I emphasize with those that try and calculate NAV on companies like ours because other than ourselves who gives you sales per foot by property and analyze by every 10 property, so you’ve got really a pretty darn, 95% of the roadmap that you need to get to the NAVs that we view the company that we work. You still have the problem but you don't have a lot of transaction in this space because these properties -- assets are so dear. And so I empathize with those that struggle with trying to come up with NAVs. And we’re going to try and help you to rethink your view on NAVs by showing you some transactions that involve the substantial pool of assets that are a broad cross section that are at substantially lower cap rates than what you all are using to get through your collected consensus of $78 bucks. So that’s the best I can do. And that comes from meeting with our shareholders, okay. So meeting with our shareholders, we ask them in terms of our strategy going forward. And there was clearly a view that the strategy is something that made sense. And that actually transacting on some dispositions or joint ventures was more meaningful than even for example, posting a third party’s opinion of the NAV of the company, which people could believe or not believe but real transaction speak for themselves. And so this really comes from an outreach program to shareholders that control well over 90% of our company. And it was a consensus view that that was something that our shareholders wanted to see. And in some cases it was instigated by them. In other cases, they concurred with the idea.

[Operator:]

Ladies and gentlemen, at this time, this does conclude our question-and-answer session. I would now like to turn the call back over to our speakers for any closing and additional remarks.

[Art Coppola:]

Thank you for joining us. Again, we’re pleased with our results. We’re not sitting back and going to rest on our laurels. We are very bullish in our ability here to continue to put up outsize growth over the next several years, both from an operational view point, as well as from a value creation view points for our development, redevelopment pipeline that’s currently there and as it gets expanded. So look forward to speaking with you, seeing you and thank you again for joining us today. Thank you.

[Operator:]

Ladies and gentlemen, at this time, this does conclude today’s presentation and we appreciate everyone's participation.