Jean Wood - VP, IR Art Coppola - Chairman and CEO Tom O'Hern - SEVP and CFO Robert Perlmutter - EVP Leasing John Perry - SVP, IR.

Christy McElroy - Citigroup Craig Schmidt - Bank of America Merrill Lynch Rich Moore - RBC Capital Markets D.J.

Busch - Green Street Advisors Alex Goldfarb - Sandler O'Neill Vincent Chao - Deutsche Bank Mike Mueller - JPMorgan Todd Thomas - KeyBanc Capital Markets Caitlin Burrows - Goldman Sachs Jim Sullivan - Cowen and Company Paul Morgan - MLV Haendel St. Juste - Morgan Stanley Ki Bin Kim - SunTrust Robinson Humphrey.

Presentation:.

Good day, ladies and gentlemen, thank you for standing by. Welcome to The Macerich Company Third Quarter 2014 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. I would now like to turn the conference over to Jean Wood, Vice President of Investor Relations. Please go ahead, ma’am..

Good morning. Thank you all for joining us today on our third quarter 2014 earnings call. During the course of this call, management will be making forward-looking statements, which are subject to uncertainty 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 Web site at www.macerich.com.

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; and John Perry, Senior Vice President, Investor Relations. With that, I would like to turn the call over to Tom..

Thanks, Jean. Just a reminder everyone on Monday November 17th we will be hosting an investor dinner in Santa Monica and that will be followed by an Investor Day on November 18th. We encourage all of you to attend if possible. Consistent with past practice on these calls, we’re going to be limiting the call to one hour.

If we happen to run out of time and you still have questions, please don't hesitate to give me a call me or alternatively Art, John Perry or Jean. It was another strong quarter. In general we continue to see strong operating results. Leasing spreads were good again for the quarter. We signed 184,000 square feet of leases, 10,000 square feet and below.

Average releasing spreads 20%, that's trailing 12 months. While Occupancy was at 95.6%, up 190 basis points compared to the portfolio at September 30 of '13. If you look at the same center occupancy excluding dispositions the occupancy gain was up 130 basis points at 95.6 compared to 94.3 at September 30 of '13.

Average base rents increased to $49.27 up about 4.6% from a year ago. For the quarter, FFO was 0.88% compared to 0.86% for the quarter ended September 30 of '13. That was within our guidance range of $87.5 and $0.90 per share for the quarter. Same center NOI came in at 3.93% compared to the third quarter of last year.

That increase was driven by occupancy-positive re-leasing spreads and annual CPI increases. And just a reminder on that same center NOI calculation, our same center calculation does not include straight lining the rents, it does not include SFAS 141 income, it’s a cash basis number.

It also does not include redevelopment of projects coming online, the benefit of those are not reflected in our same center numbers. The gross operating margin for the quarter including JVs was up at 66.4% up from 65.9% a year ago.

Compared to the third quarter of last year, dilution from asset sales during the quarter was $0.05 per share most of which related to assets sold in the second half of 2013. Bad debt expense for the quarter was 1.7 million that compared to a 1 million in the third quarter of '13.

During the quarter, we bought a 50% interest in the Gallery Mall in Downtown, Philadelphia as a result of that acquisition during the third quarter, we wrote-off approximately 1.4 million of acquisition-related expenses or $0.01 a share.

Currently the average interest rate in the portfolio is down to 4.04% that compares to 4.22% in the third quarter of last year. The balance sheet continues to be in great shape. At quarter end, our balance sheet metrics included debt-to-market cap at 39%, interest coverage ratio of 3.2 times and debt-to-EBITDA on a forward basis of 7.2 times.

Average debt maturity 5.3 years and floating rate debt as a percentage of total debt under 14%. In our press release this morning, we narrowed our 2014 guidance for FFO per share and increased the midpoint by $0.05. Our FFO per share guidance range is now $3.57 to $3.63.

So although we came in for the quarter $0.01 under the Street, we are guiding for full year 2014 FFO per share above Street expectation. Also we added some additional disclosure information in our 8-K, you’ll noted on Page 9 we added a new guidance range page, it talked about our major assumptions and how they compare to the original guidance.

Some of those include net dispositions guidance for the year which remained in total in the $240 million to $250 million range, consistent with the initial guidance. But the earnings dilution related to the 2014 asset sales has been reduced by $0.03 as the timing has changed to be later in the year compared to the original guidance.

Same center NOI guidance has been reduced from the mid-point of 4% to a mid-point of 3.63%. This 37 basis point change amounts to about $3 million over the course of the year or a $0.02 per share decrease.

This adjustment from our original guidance results from downtime on releasing space from significant bankruptcies of Coldwater Creek and Love Culture, there is a short-term earnings hit, although in most of these locations we’re putting in stronger tenants at better rents and there will be a long-term benefit.

For example on the Love Culture space which is about 88,000 square feet the mark-to-market on that space is up 50%. Our initial guidance does not assume any acquisitions as a result of buying a JV interest in The Gallery and another small interest we bought earlier in the year.

We are now including about $0.02 of 2014 earnings accretion from those transactions that number has been reduced by the $1.4 million in acquisition expenses related to The Gallery. Looking at tenant sales, the portfolio mall tenant sales per foot came in at $5.71 that compared to $5.49 a year ago.

If you look that on a same center basis excluding the dispositions sales per foot were $5.69 that compared to $5.67 at September 30th of last year. Looking at total center sales for all tenants in the same center excluding anchors our sales increased for the quarter ended September 30th was up 2.1%. At this time, I’d like to turn it over to Art..

Thank you Tom and welcome to our call. While we never like to give you downward revisions to our estimates it is important to add a little bit more color to the same center NOI focus that has come out of our earnings release.

As Tom mentioned, we have broken out for you the same center NOI that we increase that we have for our top-40 assets which comprised about 88% of our EBITDA compared to our bottom 11 assets which are above the balance of 12%.

As you can take a look at our supplemental filing you can see that the top-40 assets had same center NOI increases of 4.1% for the nine months ended September 2014 which compares to 4.6% in 2013, 3.8% in 2012, 4.1 for these assets in 2011 so very strong growth amongst our top-40 assets.

And this really validates when you take a look at the same center NOI growth that we have from our bottom 11 assets, our decision to significantly prune our portfolio and to dispose of about $1 billion of assets over the last couple of years and to redeploy that money into our best assets.

Dialing in a little bit deeper into the same center NOI numbers, if you take a look at our top-40 assets with a 4.1% same center NOI increase. We had significant transition going on at three of our very best centers Queen Center is going through a 10 year rollover in leases.

Tysons Corner is going through not only a 10 year rollover in the expansion leasing, but also the whole introduction of new tenant sort of coming as part of the densification project that we have there. And we’re going through a very significant remerchandising of Kings Plaza in Brooklyn.

All of three of these centers remain in our same center pool and while these three centers represent a significant component of our EBITDA at about 14% of the top-40 centers in terms of EBITDA.

Their same center growth for the year has been relatively flat to-date and that’s really totally due to frictional vacancy and cautious remerchandising decisions.

They will be the source of significant growth for us in years to come, but again if you take a look at the same center pool amongst our top-40 and you take these three assets that were relatively flat for the year. The other 37 of the top-40 assets actually were up about 4.7% year-to-date.

So look they’re very--very -- there is a lot of numbers that play into the same center number I will say that it does have a touch of two dimensionality to it and I would much rather increase my EBITDA at our top centers then at our bottom centers but we’re very conscious of the focus that people have on same center NOI and we’re very confident that based upon the pruning that we’ve gone through in our portfolio based upon the leasing results that we’ve been achieving here over an extended period of time and those that we project for the year to come as well as all of the redevelopments that we have underway and expansions that we’re very well poised to get significant growth out of our portfolio.

I want to now turn to dispositions and acquisitions. On our last call we had indicated that we thought that we would have net dispositions of about $250 million for the year, at that point in time we did not have any centers that were under contract to be sold.

Today we have a couple of properties that are currently under contract to be sold which we estimate will close before the end of the year. Those will generate proceeds to us of about $300 million.

We outlined of the center, South Towne Center in Salt Lake that is currently under contract and is estimated to close over the next 30 days and there is one other property that will be disclosed if and when it closes which we anticipate that it will.

On the acquisition front, we were a little bit of a disadvantage on our last call because while we knew that we were going to be entering into a joint venture on The Gallery all of the final approvals and documents has not been signed, we knew that it was eminent that it was going to be done but we have a policy of not identifying acquisitions until they are done.

So we were not really able to talk at all about The Gallery on our last call. We are extremely pleased to have entered into a joint venture with Penn REIT to own 50% of The Gallery in Philadelphia. This week we had the opening of Century 21 which is a new-to-market retailer to the property.

And over the next six months, we anticipate that we will be in a position to lay out for you both the dollar spend that we would anticipate that the venture would make as well as the return expectations but rest assured that we'd see very significant redevelopment opportunities at The Gallery, we believe that the 8% to 10% returns that we'd see on our redevelopment and expansion pipeline that we see throughout our company that these are clearly attainable at The Gallery and we look forward to sharing those projections with you once all of our entitlements are done and what's once the numbers are further refined.

Furthermore on acquisitions, we find ourselves in a little bit of a uncomfortable position today about acquisitions also because having just given new revised guidance for the year, we also have reason to believe that there is an acquisition that will close before the end of the year, it is not currently under contract otherwise we could potentially talk a little bit more about it.

So stay tuned on that and hopefully we will be able to report to you that we have added a very nice acquisition through the portfolio between now and the balance of the year. So again really just to recap the big story here is that the pruning that we outlined that we were going to do here in our company two years ago is largely complete.

We've recycled about a $1 billion and repatriated about a $1 billion of proceeds with the closings that are projected over the next month or so back into our company and recycled those into the best assets that we own. Our redevelopment pipeline remains very strong, everything is moving exactly on budget and on pace within our redevelopment pipeline.

One of the next critical junctures in our redevelopment pipeline is the grand, the opening of the expansion of Fashion Outlets of Niagara which opens up next week well over 90% leased and showing returns double-digit returns on the incremental spend.

So we are very pleased with the fundamentals that we have here and with our prospects for growth going forward. With that we'd like to open it up for questions..

Question:.

and:.

Thank you. (Operator Instructions) We ask that you limit yourself to one question and one follow-up, and then if you’d like to ask another question you may queue up again that way everyone has opportunity to ask a question. (Operator Instructions) We will take our first question from Christy McElroy with Citi..

Art, just a follow-up on the dispositions, last quarter you implied, as you said, that nothing was in the works on the disposition side, but during the quarter obviously you went under contract on South Towne. It sounds like you have another one in the works.

What's changed? And can you provide just a little bit of color on demand for B and C malls today -- maybe just some general comments on the market?.

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Citigroup:.

Well nothing has really changed other than when you are on a call and you are asked a question in your deep in the negotiations in terms of a disposition but it's not signed or the buyer is not hard on their deposits or finished their due diligence it is nothing much you can really say.

Nothing certainly that adds to your position of leverage as a seller. So it’s best to be somewhat vague in terms of that but we had projected on our last call that we would have net dispositions of $250 which was net of the $100 million acquisition of The Gallery.

And at the end of the year I think we will end up at the gross dispositions of $350 and net of the $250 just as we have said, even though about $300 million of that disposition number was not under contract three months ago. If the market remains very good there are buyers that are out there that are constantly emerging.

One of the transactions actually the next two transactions that we have under contract are each with buyers that we have not transacted any of our other mall dispositions with. So the pool is expanding and the pool remains strong..

And then just regarding the downtime on the Love Culture and Coldwater Creek space, when do you expect those move-ins? I think you mentioned 50% mark-to-market on the Love Culture space.

What's the mark-to-market on the Coldwater Creek?.

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Citigroup:.

Bobby, you want to?.

Yes, sure. This is Bob Perlmutter. The mark-to-market on the Coldwater Creek space is not as high as the Love Culture is. We had 10 Love Culture stores for assumed leases so there was no change in that and six, we’re in the process of re-leasing. We think most of the Love Culture and Coldwater Creek spaces get re-leased over the next 12 to 18 months.

So it should be re-leased in the ’15 the majority of the spaces..

And we are patient on the spaces, several of the Love Culture spaces in particular are in very good locations within some very good centers and we may have a disproportionate exposure to Love Culture just because of how their growth got laid out as a company, but the good news is, is that the real estate that we are getting back and we have taken back is in great centers.

And we are going to be patient in great centers and really chase the correct merchandising decision as well as the correct rental structure that will add NAV to the properties even if that means that they will be vacant for a quarter or two extra. We are not chasing quarterly results here we’re chasing value creation..

And I think that feeling on the real estate was illustrated about that fact that we chose not to restructure the leases which is what they would have preferred in the bankruptcy knowing that we had a lot of confidence in the real estate centers they were at..

We’ll go next to Craig Schmidt with Bank of America..

What is the next step for the Gallery? Is it the public assistance and then you can proceed forward or is there another step before that?.

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Bank of America Merrill Lynch:.

It’s entitlements in general but we are very confident that we’re headed in the right direction there with our partner and we’re really bullish on the leasing conversations that we’ve had with retailers to come to the property.

We are in a position where we’re still perfecting our entitlements including arrangements between us and governmental authorities.

So once those are finished we’ll layout with the same degree of specificity that we do all of our development, the re-development projects for you beyond on the dollar spend and the return expectations as well as the timing. But we feel very good about where we are.

And we have had numerous development meetings with our partner as well as numerous meetings with city and state officials and we’re in conversations with many tenants and we feel very good about our investments there..

And then on Paradise Valley, where does that redevelopment stand?.

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Bank of America Merrill Lynch:.

We’re continuing to talk to significant new junior anchors and anchors that come in at the center and at this point in time a part of it would be the possibility of recycling some department store space maybe one of the department stores. So we’re being patient there and we’re still optimistic that there is a good answer for that property.

It’s a solid citizen today, and we’re very confident that it can be repositioned to service, it’s immediate trade area in a better way than it currently dose..

We’ll go next to Rich Moore with RBC Capital Markets..

A question for you on CPI and the CPI bumps that you guys have in the leases.

How much does that and the fact that we have no CPI to speak of hurts same-store?.

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RBC Capital Markets:.

Rich, we typically do the calculation effective January 1st and it takes the CPI for the period the year ended end of October the year before. And in the case of this year the CPI was 1.1 for that period of time. We typically have a multiplier in our leases of two or three times CPI but in and then often the retailer will negotiate for sealing of 3%.

So it was unusual in 2014 that some of the CPI increases did not match, none of that 3% some of them by calculation did not get that high that’s a little bit unusual. I think if we look back right now where CPI is over the last 12 months it’s running about 1.8% or 1.9% so we won’t have that situation in 2015 when we do the calculation.

So 2014 was a little bit unusual in that regard..

And just to follow-on to that you raised a very good question, because we’re putting up very strong releasing spreads even though there is basically new cash to old cash as opposed to the new straight line to old straight line.

If we were reporting our releasing spreads using new straight line to old straight line our releasing spreads would be significantly higher and our same center NOI growth would be at least 50 to 75 basis points higher just by virtue of the method that we have elected to go with in terms of our rental spreads.

We always going back several years ago we just did not like recording phantom income and we preferred to have our income to be as close to cash as possible, the retailers like it also.

But embedded in our leasing structure, if we are by comparison the only mall company that is predominately using CPI cash type of clauses as opposed to straight line, then we’re penalizing our same center NOI numbers by at least 50 basis points a year. But it’s the right decision for us for our portfolio in our opinion..

Good. Thank you, Art.

And then just to follow-up on that real quick, guys, staying on the same-store NOI theme, how much of the fact that those 11 assets at the bottom of the sales-per-square-foot pool underperform on a same-store NOI basis is sort of self-fulfilling in the sense that you don’t put a lot of capital into those, you don’t spend a lot of time on those compared to the ones that have higher sales per square foot?.

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RBC Capital Markets:.

I wouldn’t read too much into that one because frankly one of the reasons that we have decided to prune our portfolio is that we find that we treat all of our children with love. And so even centers that don't generate a lot of EBITDA it’s hard to ignore them. And so you do pay attention to them.

So I am not going to say it's based upon not paying attention to them, but we are not even putting money at them. The money decision is a different issue. Money should only be spent where it can get the best possible returns and generally speaking we find that we get the best returns by deploying capital in our best centers..

We will go next to D.J. Busch with Green Street Advisors..

Art, I know you spent a lot of time on the last call talking about occupancy cost ratios, but just looking at the property, the sales per square foot by property, looking at the 10 to 20 or the 11 to 20, occupancy at 97%, obviously much higher than that if you exclude what's going on at Kings Plaza.

Cost ratios sub-13% or 100 basis points lower than the top 10, do you see just as much rent growth opportunity in that second 10 grouping as you do in your top 10 assets?.

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Green Street Advisors:.

Actually it’s a good question. The answer is yes..

Is there any -- can you quantify that at all or is it just -- how much higher can you….

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Green Street Advisors:.

They are all great centers. They are in -- the fact that they just happen to not be in our top 10, doesn’t mean in some people's companies if they are 11 through 20 here would be 1 through 2 elsewhere, but they are great centers. And there is a story behind each and every one of them.

They are all very solid citizens on Kings Plaza, Cerritos, Arrowhead, Kierland, Danbury, Fashion Outlets of Chicago, Freehold, Fresno Fashion Fair, Modesto, these are some of our best properties, and there is significant continued room to grow. Not all of them have Neiman Marcus or Nordstrom in them and not all of them have Apple in them either.

So that does influence some of the numbers but when you look at our same center EBITDA, NOI growth actually 11 through 20 outperform probably one through 10 as I think about it.

Because we are very patient when we are making decisions at all of these properties, but we probably tend to be a little bit more forward thinking in the great properties where you really want to make sure you are getting the right rents and making the right merchandising decisions.

But we actually focused on a decile of centers for us that as I was looking at our same center NOI numbers over the past couple of years that 11 through 20 category they've been batting at a very high batting average.

Bob, do you want to add anything?.

The only thing I would add Art is many of these are also because the metric of sorting is sales per square foot and many of these are larger contributors as well from an NOI standpoint..

D.J. Busch:.

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Green Street Advisors:.

This is Bob Perlmutter. I am not as certain that there is a number that becomes the occupancy cost. A lot depends on whether the tenant is already in the center or not.

A lot depends on the capital structure for new leases in terms of limiting or mitigating the capital but the tenant puts in, a lot of it depends if it's part of a market strategy or a single market store. So I think the occupancy cost is one factor but it becomes less important as you move down the tier of centers..

But it is conversely it is also true that the higher the sales per foot of a property, the higher the rent can be as a percentage of sales. So it really gets to be geometric the opportunities that you get in the great centers..

We will go next to Alex Goldfarb with Sandler O'Neill.

The first question is a two-parter, but it both centers, around the same-store NOI.

The first part of the question is, given that lower bucket is definitely dragging on your same-store NOI, what do you think -- what percentage or how much of that bucket do you think will be left by the time we get to the end of next year? And then second part of the NOI question is, a while back you guys had spoken about converting temp to perm, which would think would be additive and would help boost NOI.

So just sort of curious how much of a benefit that you are seeing from that and how much we should think of that adding going forward?.

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Sandler O'Neill:.

We are going to try not to penalize you for having two and a half questions, Alex. Good question. I will be open with you and say you that on the temp to perm, I think our being patient in making the right decision for the real estate has not caused that conversion to happen and dynamically as maybe everybody would like to see it happen.

It’s not quite as simple as marking a space to market. But it’s clearly like the stronger your portfolio, the bigger the opportunity to convert those temps to perms. But we want to make the right perm if you’ve been patient for a period of time you don’t want to like convert from temp to perm just to report that we’ve done that conversion..

This past quarter it was flat Alex and the reason for that is some of the space we got back from Coldwater Creek and Love Culture was filled temporarily..

We added temp while we are now seeking the new perm..

Exactly, so that’s why that number didn’t decline for the quarter..

And I am sorry I missed one of your questions Alex, which one did I miss?.

It was the bottom -- the 41 to 52 bucket, that 9% of your NOI and that same-store NOI is dragging. It seems like you guys are still at a pretty good clip of disposing of assets.

How much waiting -- where do you think that bucket is going to be at the end of next year?.

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Sandler O'Neill:.

Well, I rather not answer it for the end of the next year, we will clearly when we give guidance for next year as we have for the past of couple of years will be as precise as we can be about where dispositions fit in that picture. And so if you don’t mind we’ll address that as part of the guidance.

The percentage of the EBITDA that comes from that both bottom 11 assets is now under 10%.

And I see that number continuing to shrink both as a consequence of dispositions periodically, but also is the consequence of adding either to the size through expansion or repositioning through redevelopment or periodically acquiring centers that end up being in your top 10 or 20..

We’ll go next to Vincent Chao with Deutsche Bank..

Hi, everyone. Just a quick question just the Sears has been in the news quite a bit in terms of fundraising. Just curious if they have been more active with you guys in terms of looking to monetize some of their assets inside your boxes say over the past six months or so..

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Deutsche Bank:.

Okay. I don’t know that I would say more active, but we will tell you that the conversations that we have with them are relatively more frequent these days than they have been at times.

I do think that it feels like that there is some rationalizations that are occurring at Sears that are positive I think that the Primark announcement could be a net positive for the properties that they announced that they were doing some subletting to Primark.

In fact, we’re in conversations with Primark both on some situations that we have that we presented to Primark but also in collaboration with Sears. So I’d say that in terms of their appetite to rationalize and monetize that they are getting a little more urgency to their actions there and I think that it can be very positive for our centers..

Okay. Thanks for that. And then just on the overall back-to-school season, just curious if you would just share some thoughts on what you guys saw -- obviously the sales growth did tick up there, but I don’t know if that had to do with Apple or not. But beyond that, just curious what your thoughts were there..

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Deutsche Bank:.

Well I would say that in general most retailers would have said there was a sort of mix back-to-school, certain brands, certain categories did well others did not I think most are going in the holiday generally cautious with modern expectations.

In terms of kicking up Apple sales benefited in the portfolio in September with the releases but are still down year-to-date..

We’ll go next to Mike Mueller with JPMorgan..

I guess for Chicago, does that asset get expanded anytime soon?.

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JPMorgan:.

Are you talking about Fashion Outlets of Chicago or North Bridge?.

No, sorry, Fashion Outlets of Chicago, sorry..

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JPMorgan:.

No..

And then going to the occupancy increase -- 130 basis points same-store, did anything stand out as impacting that disproportionately, either, say, on a regional basis or anything else?.

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JPMorgan:.

No, I don’t think so it was pretty much across the board in terms of quality of center or the regions..

We’ll go next to Todd Thomas with KeyBanc Capital Markets..

Just in terms of the acquisition that you expect to close by year-end, I was just wondering if you could maybe share whether it’s a traditional mall asset or a mixed use or urban type asset, and then also whether it’s located in an existing market where Macerich has exposure today..

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KeyBanc Capital Markets:.

It’s a full retail, no mixed use.

It’s in one of our gateway markets and again I can't project that it is going to happen because it is not under contract but my sense of it is, is that it probably may happen and but yes that's not built into our revised guidance numbers if we had built it into our revised guidance numbers, our guidance numbers would have gone up..

And with regard to The Gallery, really Philadelphia I guess just being a new market for Macerich, fits with your urban growth philosophy.

Do you think that there are some other opportunities either in Center City or in the MSA or do you suspect that The Gallery will be a one-off opportunity in that market?.

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KeyBanc Capital Markets:.

I'd say it's one off for us in that market. I will remind you that we do have a full price mall not that far away which has been performing extremely well, Deptford Mall. But now it's -- we are thrilled to be there.

It's a very, look it's in that DC New York corridors which has been so good to us and owning great assets in that market puts you in a unique position for retailers as they allow the expansion plans and Primark in particular for example, if you look at their initial expansion into the U.S.

it is all in the Northeast including they are looking at Philadelphia, they are coming to Philadelphia and other markets in the Northeast which has been great for us..

We will go to next to Caitlin Burrows with Goldman Sachs..

You've had a lot of success adding fast fashion junior anchors like H&M, Uniglo, and Zara to your portfolio.

Could you talk about what kind of rents those larger tenants pay and whether there's any instances of, call it, rent sacrifice as you merge the in-line higher rent paying tenants to create the larger stores?.

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Goldman Sachs:.

Well they don't pay enough rents, we will start with that. But that's what we tell them also.

But I think it's a very good question and I think you are alluding to the answer which is you have to look at what it does for not only the square footage that you are dealing with of one of those significant users got also what the ripple effect and the domino effect is. Maybe Bob you could add some color to that piece of the question..

Yes. I mean, clearly, the larger format fast fashion apparel retailers negotiate their real estate very hard and they know the benefit that they bring locating in a center. So in terms of rents as Art said it’s never enough in our mind but they do bring in important element to the property.

One is the sales generation of incremental dollars which obviously allows us hopefully to capture market share. From a leasing standpoint, we often find not always but often find that their rental structure is often a push, a slight increase, a slight decrease to the rents that we have in place.

But the real benefit is taking the retailers who are in place and relocating them elsewhere inside the shopping center often in lesser locations but generally at higher rents than the tenants that they were previously occupying the space.

So most of the rent growth isn't in the fast fashion deal itself, that's generally more neutral, much of the benefit comes from moving the tenants that are inside their footprint to other locations in the mall at higher rents and improving the occupancies..

And then also back to the topic of occupancy costs. I know you guys have mentioned in the past that you think A mall occupancy costs could increase.

I was just wondering, would you say that's more because of higher rents or lower sales? And then also do you think tenants are willing to pay for a show-rooming factor just to have a physical presence in your centers?.

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Goldman Sachs:.

Well it’s actually the web-rooming is what's happening where people are researching online and then buying in the store which is really kind of the evolution of what show-rooming was with best buys and targeting post like that a few years ago in the press, but the rent growth in the great centers is in the recycling of the bottom 25% to 30% of the producers in any given center, out of the centers as you re-merchandize the centers constantly and bringing in retailers that are going to do better than the mall average and that's really a big source of rent growth in terms of the future and actually you can have rent growth and significant EBITDA growth in a great center and get the observed cost of occupancy as a percentage of sales even in a rising sales environment can go down because you are taking tenants that were paying you let's say 35% of sales doing 300 bucks a foot and you're replacing him with say a tenant is going to do pay 15% of sales and do a $1,000 a foot by way of example.

And you actually go forward in terms of your EBITDA, but you actually reduce your cost of occupancy as a percentage of sales. We've been saying that cost of occupancy as a percentage of sales is at best two dimensional and maybe not even that deep.

You have to be very careful when trying to mark a shopping center, the market from a far just by looking at that one number.

And so that's where we are trying to give full disclosure and as much disclosure on all of these metrics as we feel can be helpful to you but there is no sealing on our great centers, the opportunity really has nothing to do with the percentage of rent as a percentage of sales it’s really bringing in the best retailers who, in fact they do pay for the opportunity to have the great flagship locations which further augments the overall omni-channel strategies..

We’ll go next to Jim Sullivan with Cowen..

I’ve got a question for you again on this group 5 and maybe this should go under the heading of no good deed goes unpunished. We do like the additional disclosure, but what strikes me looking at the numbers is that the metrics in those centers aren’t really that bad.

Sales per foot have been -- were slightly up over the last year, occupancy rate up quite a bit. Occupancy costs as a percentage of sales actually up, and yet we have negative 3.4% same-store NOI.

What’s the piece that I’m missing that explains why in spite of relatively good metrics that the same-store NOI decline is so big?.

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Cowen and Company:.

Jim, this is Bob Perlmutter. A lot of it at the centers reflects renewal lease rates and much lower occupancy cost. So what you don’t see is the tenant who expires and was on a rent based on at sales productivity 10 years ago that rose to a lower rent even though they stay in place and even though their sales don’t change..

And second question also, Bob, maybe you can address this.

Talked about Kings Plaza in the prepared comments, and I know we saw maybe six months or so ago a spate of announcements or I think there were about three or four new tenants who were going to go in there that, I guess, should categorize as an upgrade, and I guess more in line with the type of tenant base at Queens Center.

I wonder if you can give us an update as to what you are seeing there and your hopes for that center over the next year..

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Cowen and Company:.

Well, from the leasing standpoint the team has made really good progress some of the new deals that have either opened or signed include Michael Kors, which is obviously a great addition to the center; Guess; Starbucks; KIKO Cosmetics, which is interesting. This is an Italian-based retailer that has come into the state.

House of Hoops, Vans, Old Navy, Justice, so a combination of juniors and better quality specialty tenant so we’re pretty pleased the centers started physical renovation or correcting all the deferred maintenance. So we feel like we’re making real progress and of course longer term the opportunity there is to repurpose the Sears building..

Okay.

What is the timing on that, on the Sears building?.

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Cowen and Company:.

We’ll announce it when we have something specific to talk about on that.

Right now we’ve decided that we wanted to be to completely re-merchandize the center, but we felt that it was more appropriate to focus on the in mall space first and get a little traction there and give it some positive direction there before tackling the 330,000 square foot Sears conversation, which remains a conversation..

We’ll go next to Paul Morgan with MLV & Company..

Just a couple of questions on Tysons, I mean you mentioned that that along with Queens and Kings as being one of the malls where, sort of counterintuitively, NOI hasn’t gone up because of the transition on some of the leasing there.

Could you talk a little bit about the upside that you think you will see in that wing and then maybe also a little color on just what you’ve seen in terms of the impact of the Metro being open on traffic and sales?.

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MLV:.

In 2005 when we bought Tysons our joint venture interest there and simultaneously went about the business of expanding the mall through the re-demise of the old JC Penny building and the addition of an entertainment wing, that expansion which is Bob you can help me with some numbers but it was over 150,000 split of space that went into that expansion and it would not at all surprise me if Bob would tell me we have 50% mark-to-market that in that space overtime period.

But what happens is, is that particularly when you’re dealing with renewals in a great center. The easy thing to do is to keep a tenant in place and take your rent increase and have no downtime but also not have a new tenant.

The harder thing to do which sometimes comes at the short-term expense, quarterly earnings or quarterly same center NOI is to bite the bullet with an under productive tenant and to either relocate them to a lesser location in a center or just not to renew them and when you do that generally speaking you’re talking about bringing in a retailer that’s going to have the compelling use and you’re talking about at least six to nine months minimum of downtime on the recycling at any one of those spaces.

And when you are dealing with centers where the rents are extremely high, you feel the pain. But it’s the right decision to make for the center, and we've been through in 40 years of doing this, I've probably been through, I can't tell you how many tenure rollovers in our different properties, but this has what happens.

And on the average properties, you tend to just renew, but on the great properties you tend to be very selective about renewing tenants and you only want to focus on the tenants that you believe can do significantly higher than an already higher sales per foot average at a mall. Bob do you want to just….

Well the only thing is I would add is Tysons is one of the centers where we see the retailers seeking to put flagship stores for a variety of reasons that we discussed earlier. And really looking to upsize their store presentation there and most importantly willing to pay a premium for that upsize space.

As Art mentioned, the mixed use development and the connection to the center sits in an area that has significant roll over, over the next two to three years. That's one of our best opportunities at the center and what we've done is we've sort of put together collection of flagship stores that bridge the entry from the mixed use into the mall.

Long-term it’s a very positive economic result it’s a very positive result for merchandizing mix. In 2014, we opened a two level Gap store, 2014 in a couple of weeks, we are also going to open a two level Zara store, in 2015 we are going to open up the two level two-level Victoria's Secret and PINK right at the entrance.

And what it's doing is setting the stage for the releasing of this expansion wing over the next 24 months. In the short-term what it’s done is it's created some vacancy that we are running at a lower weighted occupancy through 2014 which affects the year-over-year numbers. And as Art said, it’s a major contributor to our income.

In terms of sales, the sales in September were up 5.4% for the center, so again an indication that we are getting a very positive impact from the mixed use..

If you have next time if you have an opportunity to be there, the activity that is happening and with the connection the train station and the plaza being open for business and the new traffic that's being generated to the second level what was a wing that was anchored with Lord & Taylor on one book-end and a theatre and Barnes & Noble in the other book-end has really created a new sense of 50 yard line of center of gravity for the center and the smart forward thinking retailers are grabbing, it’s a land grabbing, they are grabbing and they are willing to pay.

This is the counterintuitive one they are actually willing to pay more rent and sometimes more rent per foot for bigger spaces in a great location like Tysons Corner because all the other things that it does for them as a retailer..

So is '15 still sort of a transitional year in terms of the NOI there? And we should think of '16 as kind of where you will really going to get done and see all the uplift?.

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MLV:.

No we think a significant impact happens in both '15 and '16..

Great, thanks..

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MLV:.

But obviously we are making what we know is the right decision for the real estate. We are operating with all cylinders at this property are clicking at a very high performance level. And we still have many good things to come.

We have the opening of the hotel coming up in a few months, the opening of the residential project, the complete fill up of the office tower and just the awareness that the project has gotten in the trade area. It’s really, it’s hard -- it's really hard to imagine that it’s put Tysons back on the map because it always was on a global map.

But it has really opened up our trade area and the traffic to the center of the rail stations and it’s enabled the tourists that go to the capital to come out to Tysons without renting a car, without going through the expensive driving and the time commitments. So it’s got a very bright future..

We will go next to Haendel St. Juste with Morgan Stanley..

So my first question is, I guess, more of a clarification and apologies if I missed this; it's been a long day, actually it's been a long week and it's barely Wednesday.

Was wondering if you had factored in a faster pace of temp to perm into your original guidance which could perhaps explain some of the reduced outlook?.

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Morgan Stanley:.

I think we did touch upon it a little bit and one thing we did say.

Tom you want to go ahead and jump in on that?.

Tom O'Hern:.

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Okay. Thanks for that. And secondly, on the I guess the CMBS financing environment for lower tier malls, given your activity in that segment I understand that LTVs for larger, more established sponsors on the CMBS side could approach 60%, maybe 70%, even if the property is in a secondary or even tertiary location.

But I’m wondering what the LTVs for local private guys could be is it 50%, 60%? And if that could be an issue or a limiting factor for you and perhaps some of your peers looking to sell some of these perhaps B and lower quality malls?.

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Morgan Stanley:.

I don’t see it as a limiting factor.

I’ve said before and it remains true today that the best friend of a buyer and best of the seller is a liquid debt market because of many of these buyers are not public companies and many of these buyers are willing to operate at higher leverage levels and if they can obtain the higher leverage levels it just gives them a projected return on their equity that is more attractive from their view point.

One of the deals I mentioned that we are under contract right now in two transactions with buying groups that we had not previously done business with. And I think that each of them are looking at leverage levels that are in the zip code of the range that you’d indicated that the big strong sponsors can get which is well over 50%..

I appreciate it, thank you..

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Morgan Stanley:.

But I would not want to put us out there as an expert on the financing of B malls because that’s just not much of our business anymore..

We’ll go next to Ki Bin Kim with SunTrust..

Just a couple of quick follow-ups on The Gallery, you briefly mentioned that the rough early estimate might be 8% to 10% in line with your other projects type of return, but how about from a risk perspective? Is this a more -- I’m not saying used the word slam-dunk, or is it riskier? How would you categorize this property?.

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SunTrust Robinson Humphrey:.

We feel even better about the opportunity today than we did four months ago and we’re extremely confident that we can execute this redevelopment, and repositioning at returns that are consistent with what we should for at our best assets and we’ll give more specifics on the opportunity as we get closer to the date that all the entitlements are finished up.

But on a risk adjusted basis we feel very comfortable with this investment its sitting there with all of the benefits of the mass transit and it’s ready -- it just received a big shot in the arm with the introduction of Centaury 21, so first major flagship outside of the New York area.

And there is very significant retail demand that we’ve been able to have in our conversations with the retailer. So we’re very bullish on it. We feel actually stronger about the opportunity today than we did four months ago..

And just last question. There is supposed to be talks about a casino going up maybe across the street or somewhere nearby.

Is your personal view that that’s a good thing or a bad thing for a project like this?.

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SunTrust Robinson Humphrey:.

If I was a lawyer, I would say, asked and answered on the last call. We actually had that question asked and we did answer it on the last call, but I will answer it again.

Look it all depends on what type of an operation goes into approximate area I can point to an example that SLS is doing a new luxury hotels just a couple of blocks away from The Gallery and that’s a great sign.

As to a casino, look, the interplay of the tourists that would come to a casino and the retailers that would be close to that operation, is a proven winning combination at numerous examples across the country. You can look to Rosemont as an example, you can look to our Niagara Falls as an example but -- you can look to Las Vegas as an example.

Look at all the retail in Las Vegas that exists so well with casinos all around it or inside of it. So it’s a proven -- casinos can generate great foot traffic, foot traffic can generate some great sales and good tenant. So it can be a good thing..

At this time I’d like to turn it back to our speakers’ for any additional or closing remarks..

Alright, well thank you for joining us on our call. Look forward to seeing many of you at NAREIT next week and seeing hopefully at our Investor Day in a couple of weeks here at Santa Monica. So thank you for joining us..

This concludes today’s conference. Thank you for your participation..