Jean Wood - EVP IR John Perry - SVP IR Art Coppola - CEO Tom O'Hern - CFO Robert Perlmutter - COO.

Craig Schmidt - Bank of America West Golladay - RBC Capital Markets Jeff Donnelly - Wells Fargo Alexander Goldfarb - Sandler O'Neill Vincent Chao - Deutsche Bank Todd Thomas - KeyBanc Capital Markets Christine McElroy - Citi Michael Mueller - JPMorgan Nick Yulico - UBS.

Good day and welcome to the Macerich Company First Quarter 2017 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Jean Wood. Please go ahead ma’am..

Thank you for joining us today on our first quarter 2017 earnings call. During the course of this call, management may make certain statements that may be deemed forward-looking within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially due to a variety of risks, uncertainties and other factors. We refer you to today’s press release and our SEC filings for a detailed discussion of forward-looking statements.

Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included in the earnings release and supplemental filed on Form 8-K with the SEC which are posted in the Investor section of the company’s website at www.macerich.com.

Joining us today are Art Coppola, CEO and Chairman; Tom O'Hern, Senior Executive Vice President and Chief Financial Officer; Robert Perlmutter, Senior Executive Vice President and Chief Operating Officer and John Perry, Senior Vice President, Investor Relations. With that, I would like to turn the call over to Tom..

Thank you, Jean. Consistent with past practice will be limiting the call to one hour, if we conclude and you still have questions please feel free to call me or John Perry or Jean Wood. For the quarter FFO was $0.87 per share compared to $0.87 through the quarter end March 31 of 2016.

December was slightly ahead of our guidance range which was primarily due to the timing of lease termination revenues. Same-center growth in NOI excluding straight line rents and SFAS 141 income was up 2.2% for the quarter. We have forecasted same-center growth for the year to be in the range of 3% to 4% and we are still comfortable with that range.

We did expect the first quarter and second quarter would be the lowest quarter to be significant decline in occupancy roughly 80 basis points, resulting from the high number of tenant bankruptcies in the first quarter.

The gross operating margin for the quarter was 68.4% down slightly from 68.6% in the first quarter of last year, occupancy declines were the primary reason for this decrease. Bad debt expense for the quarter was 1.6 million, up slightly compared to 1.2 million in the first quarter of last year.

Lease term fees were 2.7 million for the quarter, down compared to 3.5 million for the first quarter of 2016. During the second quarter the average interest rate was 3.57%, very comparable to 3.62% a year ago. Looking at the balance sheet, it continues to be in very shape. At quarter end debt to market cap was 43%.

The interest coverage ratio was 3.8 times which is the best in our history as a public company. The average debt maturity is also very strong at 6.2 years. We do not have much in front of us in terms of loans, maturing in the next two years with only 99 million maturing this year and 338 million in 2018.

The financing market remains good for us even as rates have increased and now come back down, the borrowing spreads decreased and we were able to do 10 year fixed rate loans at less than 4%.

For example, in March we refinanced Kierland Common, we closed on a $225 million loan at 3.97%, the underlying treasury at that time was about 2.50% which means that the spread over the treasuries contracted as rates had gone up. The prior loan was a floating rate loan of a 130 million with 2.6% interest rate.

During March, we utilized the 140 million of sale proceeds from the sale of Northgate Mall, Cascade Mall in the office building at Country Club Plaza to buyback 1.5% of our shares, 2.2 million shares. The average buyback price was $64.18.

In the earnings release yesterday, we reaffirmed our estimate of EPS and diluted FFO per share guidance for 2017 in the range of $3.90 to $4, included in the guidance is $0.08 of dilution from the sale of Northgate Cascade and the office building at Country Club Plaza. No other 2017 dispositions or acquisitions are included in that guidance.

Other major assumptions include same-center NOI, I mentioned in the range of 3% to 4% and that remains unchanged.

Lease terminations for the year estimated at 15 million, we originally forecast that revenue primarily to fall in the third and fourth quarter as noted previously some of that 2.7 million did hit in the first quarter and we expect that we will recognize some more lease termination revenue in the second quarter as well.

Negatively impacting FFO in the first quarter was the write-down of the technology investment which after the tax effect had a negative FFO impacted about 6.5 million or $0.04 per share. In early February, we were concerned, although not certain about the long-term liability of this investment accordingly we did consider in our original guidance.

My last comment on guidance is that although, we expect about $0.03 of accretion from the share buyback, we are not adjusting our guidance range at this time, but we will take a look at it after the second quarter results are in. With that I would like to turn it over to Bob..

Thanks Tom. First quarter results within the Macerich portfolio reflected a negative impact to occupancy caused by the recent tenant bankruptcies. Despite these headwinds, our high quality centers continue to produce strongly seemed spreads. Sales for the portfolio increased to $639 per square foot.

Our trailing 12 month leasing spreads decreased slightly to 17.5% from the fourth quarter rate of 17.7%. Leasing spreads continue to be strong as at the top tier centers. Within the portfolio of the Top 30 centers generate sales of $739 per square foot and represent 80% of our annual net operating income.

This performance provides the high degree of stability in the current environment. Average rent for lease signed during the trailing 12 month period was $56.93 per square foot, up marginally from the fourth quarter. During the first quarter a total of 601,000 square feet of leases were signed, representing a decrease from the first quarter of 2016.

New tenant leasing activity was consistent with the prior year. The average term for leases signed in the first quarter was 5.2 years. Apparel shoes and Jewelry represented 40% of the quarter's activities while food and restaurants were 21% and cosmetics health and beauty were 17%.

Occupancy at the end of the first quarter was 94.3%, this represented an 80 basis points decrease on a year-over-year basis. Store closures from tenant bankruptcies during the first quarter accounted for a 50 basis points decline in occupancy. Temporary occupancy ended the first quarter at 5.3%.

Portfolio sales ended the first quarter at $639 per square foot, which represented a 2.2% increase on a year-over-year basis. On a same center basis trailing 12 month sales were $641 which represented a 1.9% year-over-year increase.

I would like to next take a couple of minutes discussing bankruptcies by reviewing the activity over the past three years. At the beginning of 2014, our current portfolio centers had a leasing level of 95.4%. We ended 2016 at 95.6%, effectively our total occupancy did not change over the three-year period.

But during the same time period a total of 33 retailers located in these centers entered bankruptcy. These stores represented 255 locations with just over 1 million square foot which is roughly 5% of our non-anchor space. Excluding the sport authority spaces approximately 450,000 [ph] square feet or 55% of the square footage was closed and liquidated.

These closed tenants had an average base rent of $47 per square foot at the time they went into bankruptcy and they generates sales of only $253 per square foot. The sales were less than one half of our center averages. To date average base rent of $51 per square foot has been achieved on the releasing of this space.

Equally as important we've been able to replace weak retailers like Love Culture, RadioShack, Cache, Wet Seal and Coldwater Creek with more contemporary retail concepts that include Anthropology, Timberland, Vineyard Vines, [indiscernible], Adidas, Soft Surroundings and H&M.

These tenants improved the draw of the individual properties and should generate sales at or above the portfolio of our average. Bankruptcy activity is the beginning of 2017 has remained elevated. Today we have nine retailers who have declared bankruptcy totaling 69 locations with 342,000 square feet.

These spaces had an average base rent of $47 per square feet and generate average sales of only $226. Clearly the low productivity of these stores has been the primary reason for the bankruptcies. We expect two additional retailers to announce bankruptcy during the second quarter.

It is clear the leasing environment remains challenging, the quality of the portfolio provides great stability as retailer continue to seek out must have retail locations. The bankruptcy of weaker retailer presents challenges for the leasing teams, however it is also an opportunity to improve already strong assets.

In dealing with these bankrupt tenants, we try to make the right long term decisions for each property even if the shorter-term metrics are impacted. The redevelopment in the former shares back at Kings Plaza is well underway and scheduled for fall 2018 opening.

In addition to the previously announced anchors in Primark and Zara, we are completing deals for two additional retailers that will occupy the balance of this space. We expect to make announcements once leases are signed. Rational [ph] it's a field office proceeding with reconstruction and also schedule to open in 2018.

Retailer interest continues to grow at the development and investment in downtown Philadelphia provide the unique opportunity to recreate and re-imagine three city blocks around the city transit hub. In conclusion, despite the headwinds of specialties store bankruptcies our portfolio remains exceptionally strong and well leased.

The replacement of lower productivity tenants within our centers has been consistent with the evolution of new retail formats for many years. Leasing spreads remain at historical levels and demand remains strong as illustrated by maintaining our occupancy despite over 1 million square feet bankruptcies over the last three years.

We continue to believe the premier eight centers that propose our portfolio will increase their market share and importance in the omni-channel distribution of retailer's goods. And with that I would like to turn it over to Art..

Thanks Bob. Thanks Tom. I'm going to follow up little bit on what Bobby just spoke about regarding specialty store closers. As I look at it and I ask Bobby and Tom to take a look at all of the closers that we've had, could have gone back over the history of mankind in the last 41 years, but we picked three years, and I look at that.

If there were a tremendous number of amount of square footage that went through bankruptcy. But that’s not unusual, that is something that is the way of the world.

I would say that, as pointed out by one of my peers, some of those bankruptcies were maybe accelerated due to the retailer being burdened with too much of debt, and that was part of the private equity firm's ownership of that retailer.

But as Bobby pointed out at the end of the day it was really because they were lousy retailers, that’s why they won't broke. And the definition of a lousy retailer is somebody who doesn’t produced, Bobby mentioned the numbers of these retailers did $250 a foot.

So being the eternal optimist, frankly, I see bankruptcies as being a blessing in disguise because it takes a tenant who is occupying a space and producing no business and gives us back that space earlier than the normal expiration of the term.

So that we can go in and do what we do every day, which is to take space and to recycle it into more up-to-date ideas and uses and concepts. And if you look at it from a micro viewpoint over the last three years, from December of 2013 through March of 2017, our occupancies were the same.

We had I think Bobby mentioned 1 million square feet of retailers go through bankruptcy. During that little over three-year period, the average base rents in our portfolio went from $41.88 a foot to $56.31 a foot for an increase of 34%.

Total sales of all of our shopping centers that we own today compared to what we owned December 13, went from 562 a foot up to 639 a foot and if you just look at our Top 40 centers, they went from 604 a foot to 662 a foot. The percentage of NOI that we get from our top 40 centers increased from 89% of our total EBITDA 3.5 years ago to over 93% today.

So, my might take away, is that the bankruptcies of last three years helped us improve our portfolio, helped us bringing tenants at better rents, better ideas and at higher productivities. Those are what the macro numbers say and that what you see if you walk our malls.

I would point out one thing, I think Bobby mentioned, which some of you may or may not have picked up on, he talked about some of the new leasing deals being done at $51 a foot and you might asked yourself the question, well if you're average AVR is $56 a foot, what's going on.

Well what's going on is that the guys that go broke are generally the guys aren’t that good in the first place. And so therefore we put them in the weaker spots of the center that don’t command the average base rate of the center.

So -- and by the way that explains -- when I look at the makeup of the retailers that are going broke this year and that might get broke, they pretty much also fit the same profile, they have been dead man walking, waiting to die and this just accelerates the process, so that we can move forward.

I want to talk about a point, moving away from leasing, that Tom mentioned regarding the write off of that private investment amount, the real estate investment that we had, and I know that at least one of you on the call likely asked question about that, as all S&P 500 companies do, we use venture capital investments as a way to stay abreast of what's happening amongst the disruptors and startups in our world as well as to incubate new ideas and to find new technologies.

Over the last couple of years, we've made about 8 investment totaling about $18 million in the various ideas, some of them are pure retailers that are about to open say their first, there second, there third full store, but the one that caused the write off was the different one.

It was a large investment, it was $10 and it was into a platform that was designed and the thesis behind the company was that where they were going to essentially be a facilitator for digitally mated retailers as well as European retailers to open stores in the U.S.

They build up a tremendous amount of overhead to support that ideas but they really build themselves as being the bridge between clinks and bricks. Which had they turned out to be that, it would have done a wonderful business, and would have been a terrific thing for us to use to bring new ideas and new concepts to our malls.

As Tom mentioned in early February there were issues regarding and it turns out that the company failed.

Look we have some takeaways from that, we realized that we make significant investment into one company, but the other takeaway was that we are going to be best served to have us be the facilitators for clicks coming to bricks, we're not thinking about third parties being the one to get in the middle of that, we've been very successful in our early efforts on that in a couple of our veteran investments and then in early state investments, and some exciting retailers like Beta, Ministry of Supply each of which got a couple of locations open with us and more 4 or 5 on the way and provide exciting stores for us.

Going on a couple of other topics, you may have noticed in the development pipeline that we moved out the Candle Stick project two years, that's completely driven by the fact that we're partnering on that property with the master developer that controls over a thousand acres or so in the area, including [indiscernible] and you can well imagine that when you are dealing with a thousand acre development in a city like San Francisco that there are going to be delays in the implementation of the infrastructure, et cetera.

Those we thought we were going be able to still maintain as scheduled, but as we look at it, the realistic opening is what we put out there now, leasing, pre-leasing is very strong to tremendous location and we’re very bullish on the opportunities there.

One final point that I want to touch upon, which has been touched upon at [indiscernible], but unfortunately still appears to be in the drinking water that’s poisoning the sentiment around public investors and their views towards mall [ph] companies. I will speculate that the U.S. is over retailed, I will speculate that the U.S.

has too many department stores, I believe that as department stores shrink their fleet, as Macy's and Penny's, that is a fundamentally good move for Macy's and Penny's.

I've said it dozens of times, my peers have said it dozens of times, this frees up capital for them, hopefully for them to focus on that capital and more importantly their top merchandising resources on their best stores.

As I think about and we look at, if each of them were to reduce their fleets by 35% or 40% or 50%, first of all very few if any of those stores would be in our portfolio because of the quality of the portfolio that we have. But secondly, if it's good for them, its good us.

We're in a middle of a significant rationalization in the retail industry, this is good for the haves, it's bad for the have nots. It’s an environment where the richer are going to get richer, the poor is going to get poorer, that's luck.

I am absolutely convinced that the top 20% or so of the malls and I could say the top 50%, but let's a safe number that hopefully most people wouldn’t believe is arguable, say 20%, they have a place in future. That’s exactly where over 90% of our EBITDA comes from.

Can you imagine for a minute that the anxieties the public investments had over the disruption that they think is happening with Amazon and ecommerce, can you imagine that resulting in major retail stores on 5th Avenue in New York or Michigan Avenue in Chicago or any other great High Street going away.

I mean if that happens -- look the world is a different place, and if that happens we're all going to have to think about a complete recycling. I'll even take another step and tell you in that environment I would like to have tremendous real estate and that’s what we have. And that’s what we have.

We have real estate that has the densest population within the short trade area of any of our peers and certainly well positioned and they are in gateway cities. So we are well positioned for anything that comes over way and believe it or not we are optimistic. With that I would like to open it up for questions..

Thank you. [Operator Instruction] And we will take our first question from Craig Schmidt with Bank of America. Please go ahead..

Thanks for the information and outlook for San Francisco, I am wondering about the other two projects in the Seattle pipeline, Paradise Valley and Westside Pavilion.

Is this -- there is a continues place on the Seattle pipeline, does that having to do with still you're trying to figure out what you want to do, or are you just waiting for a more opportune time to proceed with those redevelopments?.

Clearly on Westside Pavilion we are weighting three or four significant ideas, we need to get possession of one of the anchor locations there to proceed on any one of the three or four. We are -- and they really -- they go 180 degrees on the spectrum.

There is one ideas that's all retail, there is another idea that has no retail, and there is another idea that has some retail and some other use, and you can tell I'm being careful about talking about what that other use is.

At the end of the day, it kind of fits into that bucket that I talked about, the Armageddon Bucket, where let's just say the whole world comes to an end for retail, okay that’s fine. If that happens I want to own some great real estate.

That real estate will be more valuable on a cost adjusted basis, I am including any capital of store [ph] into it, when it gets redeveloped I would bet anything, it will be more valuable than it was at a cadence as a retail project.

Paradise Valley, that's around the year, it's a great real estate, it's under performance in the shops, it's really bizarre because the department stores rank kind of in the middle of the -- in any one of those -- you know they have six department stores there, six anchors, which tells you that anchors are not necessarily a proxy for success.

And the anchors, some of them got like number three or number four store out of eight or 10 stores in the market at that center. But the specialty stores can't get arrested. So there is a situation where we kind of hostage to getting back position from one or two of the department stores, so that we can start the phasing.

My guess is we're not going to be the one to actually do that project, because it's not that compelling, but it's fundamentally great real estate, the highest wealth of zip code in Arizona and maybe even the South West. But we need to get back a box or two in order to move forward and we are hostage, we can't get them back.

We can't them back from the department stores..

Great and then maybe just an update on the Heritage JV?.

Well, just to remind, that is a Joint Venture between us and Heritage in nine Sears stores and nine parking lots at nine of our malls.

To date I don’t know -- what kind of update would you like to hear?.

I just wanted to know are you going forward with picking over 100% of that space or are you still looking to do 50-50?.

I never was looking to do 50% recaptures from any of the Sears stores. It was done in the early phases and I think it was a great move to put Primark in the half or so of the Sears box at Danbury and Freehold and that’s fine, that was a good idea.

But honestly, I don’t see the economics makes sense to recapture 50% getting at the other seven locations and effectively pace Sears to them, shrink into the other half of the space. Because A, it costs too much money to do it and B, ultimately you're kicking the can down the road.

So if and when Sears does fail, that the opportunity to redeploy the other half, probably doesn’t make a lot of sense. So at this point in time, I really don’t see anything happening on the development front of any of the other seven boxes..

Our next question will come from West Golladay with RBC Capital Markets. Please go ahead..

Looking at your center you mentioned the dead man walking, probably the low productive tenants 200 to 300 a foot.

Can you talk about the demand you have waiting to get into the center? Is it enough to reform all these low-quality tenants that are just there because you have a lease with them?.

This is Robert Perlmutter, obviously the leasing of these spaces is not different from the leasing of any of the spaces in the center. To the extent that there is a stronger productivity models, there is going to be more demand in the lower productivity models there is going to be less demand.

I think the real key on the lower productivity centers is really changing the nature of who you are going to re-lease the space to.

Many of these tenants were built on a model that the more stores you had the more productivity you had and they intended to be two 2,500 to 4,000 foot tenants who really traded off of the foot traffic at the mall, trade off of them.

And what we are seeing on the lower tier centers is often the best opportunities to aggregate this space up and look more at box uses or uses that were typically outside the mall as opposed to inside the mall.

So again, it’s a higher productivity center the demand is good, whether the tenant went bankrupt or the tenant wasn’t renewed at expiration, it really doesn’t change the discussion. At the lower tier centers I think you will see a change in the nature of the tenant and it will be a larger format, more discount oriented tenants..

Our next question will come from Jeff Donnelly with Wells Fargo. Please go ahead..

Maybe a first question maybe a little bit of two part or I guess -- alright I was just curious, if Sears is thrown out there that they might look to dispose of another tranche of stores, I am curious, is there other opportunities for Macerich to explore transactions of anchors or do you think you're done with that at this point? And I guess maybe related to that, on the acquisition front, are there other deals that might be in the market place that you think would reveal pricing for better than A quality malls?.

The Sears stores that were offered for sale recently, none of them were in our malls, so we wouldn’t be interest in any of those.

As far as any opportunity to acquire department stores from department store operators, there are a number of department stores that I would love to get back from, I can name in my head one, two, three, four, five different names, there are five different names that each of them had at least one department stores I would love to get back from them and we're at various stages of conversation around that.

As one of my peers said yesterday, the opportunity to make a lot of money on taking not only the square footage but the land that these departments stores were given 30 years go to help create these malls and to repurpose that land into today's use and they help us really position these centers for the 21st century.

It’s a huge opportunity especially when you’re in high population trade areas in gateway cities. As far as on the acquisition front, I think I mentioned and we've even talked about it, alluded to it earlier.

One of the reasons the private market values are still so strong is that the great malls and retail location that are out there are in the hands of strong people, who just have no interest in selling them and yes the demand to invest into those malls, either buy them or to joint venture them, just keeps growing as the capital -- sources of capital of the world, we get more educated about the space, look we were really lucky last year to buy a Country Club Plaza with Tom [ph] and organization which is going great, but I don’t see any acquisition opportunities for us in the near-term, having said that every time I say that sometimes Eddy surprises me, but I don’t see it.

.

And just one other question on, just curious on your view on tenant improvements, if pressures on -- and maybe none of your malls or maybe just all malls, but if pressures on sort of unit level store profitability are accelerating and ultimately shortening the life cycle of some retailers or increasing tenant turnover.

Is it fair to say that in the mall industry we’re going to agree to expect landlord, they're going to have to chip in more dollars more frequently for TIs going forward? Do you think that's going to be one of the big shift if you will in the mall space?.

I'm not sure that’s it's going to be a huge shift, but I think clearly capital is part of the discussion. As you know, in our business its very rare that on renewals tenant will receive any tenant allowance or concessions from the landlord especially at the better centers.

So you really talking about capturing new tenants and I think as you see either tenants earlier in their development stage of their store fleets or tenants only looking for the prime locations or the nature bringing in more food and other non-traditional usage into the center. I think it's likely that the capital structure could be different.

The rent would hopefully reflect that difference, but I don’t think there is going to be a significant change in our tenant improvement cost and I don’t think financial show us significant changes..

And that was happened, Jeff over the last couple of years it's trended down. Last year 2016 was lower than 2015 and year-to-date we're trending lower than 2016 was so. In actuality we're funding less in term of tenant allowance then we have in prior years. .

And have been said that Jeff, I have to add that there in one area where tenant allowance will go up, and that’s not the defensive area, that is in the offensive area.

As I have gotten to know a lot of these digitally native in retailers or the company has gotten to know them, it's clear to me that when their ready to fund their estate rollouts, they're funding those rollouts with equity capital from venture capital firms is really a terribly expensive way for them to fund their rollouts.

So we have talked to some of these digitally native retailers. I said look, we'll help you with some of your build out, give you a little bit more than we normally would give to a tenant, in return for that we want a share in the reward to the extent that you do well.

So as we embrace more and more kind of startups digitally native types of retailers, we are going to offer them more tenant allowance than normal to bring them end of the center, but we're also going to get paid for it in the way of a variable rent structure..

And our next question will come from Alexander Goldfarb with Sandler O'Neill. Please go ahead..

Continuing on the investment team, if we can just go back to the write-off you mentioned two steps, you mentioned one, 10 million that you wrote-off, then you also mentioned that there are eight investments for 18 million. So I am guessing that the 10 was incremental to the 18. But if we could --..

No, 18 was the total, 10 was part of that, so you could think of that we have 8 million invested in another eight ideas..

Okay. And then can you --..

Don’t always assume the worst Alexander..

We never do, in retail end we never assume the worst.

So then a question -- I mean small investment mature, but just can you give a sense for sort of $1 million in a venture like, how that helps the venture and then what sort of opportunities are these? Are they operating businesses, are they just few folks at coffee shops trying to make something and go with it, if you could just give us a little bit favor?.

I mean these are early stage Series B type of investments. So and it's usually with a digitally native retailer who has big aspirations to establish a brick and motor platform on a national scale. And we're looking to find these people like somewhere after they've opened their first store, but before they opened their 20th stores.

So we are taking positions in not only the enterprise, but also becoming a distribution channel for them. So that we can help them and nurture as they grow their idea. We are very selective in what we are doing there, we have only done a couple of those but we are going to do more..

Okay.

And then going to Craig's question, because you were -- you opened a little bit on Westside Pavilion, and number of months there was article that the Macy's box was purchased by a third party, so when you were talking about the need to acquire a box; one, does it involves that’s, and two how does it work, if it doesn’t involve that, how does it work when you want to do a redevelopment, someone else owns part of that project, how does it work for maximizing the value?.

It doesn’t have any impact due the fact a third party bought the Macy's box. We had the opportunity to buy the Macy's box also, we just didn’t -- we had a plan for what we wanted to do and we didn’t need the Macy's box to implement that plan.

I think whatever they do with the with the Macy's box will be a net positive for the property, I've heard them talk about, I've heard it talked about residential, which I am not sure maybe they will do that, but I think the more likely idea is creating office which will bring a lot of bodies and a lot of life, and for creative office the rents in that part of the world are extremely high.

We are waiting to -- we need to recapture the Nordstrom box and Nordstrom, as soon as we do that which we have the right to do that, I'm sure it will happen in month's not years, then we'll be able to be more transparent about what we're going to do with the property.

But we're also -- we're still debating it, we're still debating all retail, none retail, some retail and some of something else. All three options are good options..

We will move to our next question from Vincent Chao with Deutsche Bank. Please go ahead..

Tom I actually wanted to go back to the guidance for a second here, so through some benefit from the share [ph] buyback so far, no more dispositions contemplated, but presumably they are low share buybacks as well contemplated going forward.

But I guess with the other parts of guidance being held constant, is that just because now you are waiting to see how the rest of Q2 shakes out.

It sounds like you have visibility on two additional bankruptcies but is there a concern that there might be much more than that or are the discussions you are having suggesting that there is couple of more in the bubble there?.

Vin, obviously as you listen to Bobby section today, there were headwinds in -- I think it would be a little premature to start bumping guidance up at this point. So we'll see how the second quarter goes, we'll see how the leasing efforts going in the second quarter and then we'll take a look at that.

As I said there is roughly 3%, excuse me $0.03 accretion from the buyback which happened in March, there was no effect of that that really hit in the first quarter.

And we will take a look at how things look in total, not just that aspect, how the leasing is going, how we have absorbed some of the space we've gotten back from bankruptcies, and then we'll address the range again at that time..

And Vincent just to add to that, since I'm feeling contrarian today with my partners. Knowing the couple of the names that Bobby was referring to, even if they hit the wall, I just can't imagine that's going to cause a change in our guidance..

I really appreciate the color that you gave on the bankruptcies that you've had so far in terms of the staff, the portfolio stuff if you will with lower productivity. I guess every mall good or bad has some proportion of that lower productivity tenant.

Can you give us a sense of what percentage of the annualized coming from those lowest quality attempts maybe in that 250 or lower level outside of the bankrupt ones?.

It’s a small number, I'll answer it for you. My guess is it's between 10% and 15%, and I'll tell you how I got there. So if I am wrong you'll at least see -- you'll know how I got there. I think a third of our tenants do well below our mall averages, they do around say 300 bucks a foot.

I know that the rents those guys pay are not commensurate with what we get on average from the portfolio. They tend to be significantly below the average, close to half of the average. And they are already in generally lousy locations.

Look people don’t just all of a sudden go from be in $1000 a foot tenant to $200 a foot over night, they kind of start their life being lousy, but you give them some space anyway, and you tend to give stuff on the ten-yard line.

So those rents are probably significantly below the average rent, if I had to -- if you just put a gun to my head and said, alright if every one of those 30% of the tenants that do well below your mall average, by the way, our malls are the same as everybody else's malls.

What hit the wall, what would be the impact, if they all hit the wall the same day on income, I don’t know 10%, 15%, but I'd love to have them all back. I wouldn’t want them all the same day with same day, but I would love to have the mall back and we're not going to get them back anyway at the same day, so it doesn’t matter..

Our next question will come from Todd Thomas with KeyBanc Capital Markets. Please go ahead. .

Art, back to the technology investment I guess, most of the other investments as you mentioned are about a $1 million and this one was $10 million.

You mentioned as a company then you wrote down was a facilitator for some digitally native retailers and clearly you have the platform and the ability to bring those retailers to your malls which we've seem.

So what was it that this company was doing specifically was it helping you seek out these retailers or something in terms of the fit out of the space or something else and does the failure of this company or platform cause any sort of problems or delay in sort of the roll out for some of these digital native retailers..

No, it doesn’t delay. Actually, it expedites them coming to us. It's my mistake, it's my bad. I made the investment. At the time it just sounded like great idea, they were taking retailers that didn’t want to have a nexus in a state for example and they were even offering to staff the stores.

So the retailer would essentially open a store through a store that this company would lease for us, and this company would even put employees on the floor, they would put smart mirrors into the location. It was the store of the future that they were talking about.

And it kind of sounded good, like many failed concepts, ICFC gave them store of the year award a couple of years ago. Its seems to be like the sports illustrated kiss of death. Look I made a mistake; I shouldn’t have put that much money into one idea. If it would have worked, it would have been massive, the upside.

It didn’t work, that was a bad business plan and I concluded that the idea of trying to accelerate that process, which was what attracted us mainly to the idea, was that, you could literally potentially have several hundred new stores get attracted to your portfolio through this intermediary.

While that idea, that’s a pretty nice idea and that idea of investing 10 million into somebody, taking a chance, taking a risk that it would work was appealing, the risk reward looked to be fine. Look the risk was 10 million. I don’t think I'll be making that big a debt again, but the reward was massive had it worked..

Okay got it that’s helpful and then just stepping back a bit, I guess as we think about the mall business, high quality shopping centers, Tesla sort of came out of nowhere, Apple change the landscape of retailer earlier [technical difficulty].

I am sure if there is sort of anyone one thing out there right now that you are looking at, but when you sort of thing about the business today, what is it that we could be missing, that could sort of change landscape going forward from here? Is it food and entertainment, is there a new concept or category, is it the online only retailers? What you think looks much different or really changes things up over the next couple of years?.

This is Robert Perlmutter. I’ll start the answer, I think there is a number of categories and I'll put it under the umbrella of how people lives their life.

So we see increasingly interest from, whether it's health clubs or Soul Cycles, or that type of tenant or DryBar [ph], where the customer is has a certain lifestyle that isn’t just buying apparel or shoes or accessories.

So more and more we see, these retailers are seeking out the mall because of the footsteps and the amenities and more and more we see traditional mall retailers reacting really positively when you tell them you did a deal with Soul Cycle or you have a deal to DryBar because increasingly it means there is more touches with their customer and that’s what they are really looking for.

So I think you are going to see a broadening of uses and I think it's going to be more reflective of the customer's lifestyle. So we were talking about this in terms of marketing.

Historically, the opportunity was to use marketing to drive people to shop at the center, and these centers really have to evolve into venues that meet to customer's lifestyle and that’s where I think in particular the identification and the use of mix users is important..

Another thing I’ll just add to that is that, I guess not that long from now, I’ll be able to say, over the past tens of years, but I didn’t say over the last 41 years, I can guaranty you that nothing has changed. This is a Darwinian business. The healthy get healthier and the weak die.

Just look at every one of our tenant rosters from 20 years ago only two or three of our Top 10 tenants that were here 20 years ago are still in business, and the names that are our best tenants today didn’t even exist 10 or 15 years ago, that’s been the way of the world, at great retail locations, so it's a history of the bazaars 2,000 years ago.

I am sorry, it's true..

We will take our next question from Christine McElroy with Citi. Please go ahead..

Just a follow up on Vin's question, just to get a better sense for exactly what's in guidance, currently Bob, you talked about the nine retailers with the 69 locations plus there is another two retailers you talked about that might file, how much of that space do you expect to get back this year within your guidance? And of that space how much of that will be negotiated lease termination versus space, rejected their bankruptcy? And then sort of related to that, how do you think about rental lease today versus sort of closings in this environment?.

So Christine, I’ll hit the first part of that, on lease term fees, that’s a negotiation, it's always an uncertainty, in the assumptions and the guidance. We've got 15 million in the numbers for the year and that’s our assumption on average of last six years, we've averaged about 12 million.

And it's hard to say at this point in the year if it's going to be too light a number.

But it certainly could be depending on some of these negotiations go and its always a choice and whether you add some bankruptcy just the threat of bankruptcy you can either negotiate for at least termination fee or you stay with the tenant and you got rent coming in and occupancy..

And I think in terms of likely scenarios I think we probably have one situation that’s going to generate termination fees and one situation that’s probably going to be restructure with some store closing, so some impact, but not complete liquidation. In terms of how do we approach rent relief, I would say we approach it very stubbornly.

We believe that our assets are strong assets, we believe that rent relief whether it's a bankruptcy or through a negotiated settlement is an investment in these companies, we're investing our capital on these companies.

And candidly, there is not a huge list of tenants who have successfully gone through a bankruptcy restructuring and become strong buyable tenants in the future. So I would say we believe in our real estate, we approach rent relief very stubbornly. We do recognize that it may impact our short-term metrics which I mentioned before.

But at the end of the day we are trying to make the right decision long term for these assets and if we don’t, if the retailer can't sale us on making an investment in their business, we are not likely to do it..

Okay and then secondly with the share buyback in Q1, it was tied to the asset sales you've done year-to-date, and how you are thinking about doing further buybacks at this point? Would it only be with further asset sales or are you open to doing opportunistic buybacks in the current market?.

No, we have said before, but I'll say again, and maybe I haven’t said it to you all, I've clearly said it in my board room, we'll match fund those.

It won't be perfect, but we'll match fund it, the way we see it we are selling out of non-core asset at a fair price to buy shares in the remaining tremendous pool of assets at a significant discount to a fair price. We'll match fund it. It won't be perfect timing on the match funding, but we will match fund it.

Was that the question?.

Our next question will come from Michael Mueller with JPMorgan. Please go ahead..

So first just wondering can you talk a little bit about what's being going all with the occupancy at [indiscernible] and then secondly on the redevelopment pipeline, once you go beyond what's disclosed in the stuff, can you talk about how deep that is?.

Bob will talk about [indiscernible] and then I'll talk about the pipeline..

Michael I assume you are telling about the increase in [indiscernible] right?.

Yes..

We actually had a couple of moves that were made at the center and let me start with the comment that it’s a small center, so it look smaller amount of square footage has a pretty big impact.

But we actually had a two-level store that was occupied by Banana Republic and we moved them out of that store into a smaller store, and we actually released the majority of their own store which was primarily second floor space and a little on the ground to [indiscernible] swaps.

So that improved the occupancy and then also Apple expanded at the center. So those are the primary changes. It's really been some moving about..

And then on the development pipeline, we sit down with our developers every -- periodically and we go over, all of the good ideas that we have. Now a lot of good ideas are a little futuristic, some of them are great ideas, but you have to wait for an event to happen, like getting back the department stores.

And some are just ideas that you think are terrific, but they are just not ready for prime time because you have to get some zoning or whatever. And when we sit down in those rooms and we look at the different ideas, I'm not going to -- this is not an attendance [ph] of our shadow pipeline or our supplement.

But just quickly in my head while I was listening to Bobby answer I came up with a little over 2 billion assets that I would green light tomorrow if everything was ready to go..

Okay..

The opportunities are tremendous this is the great future of great malls in highly in dense populated areas in gateways to these.

And a big driver of that future is going to be combination of the recap or some space from department's stores, but it's also going to be the arrival of autonomous vehicles, so that we can adjust our parking rations to a more reasonable number and intensify the properties..

Okay and that 2 billion, that’s all redevelopment of existing centers that’s not new group up right?.

I got one ground up outlook property and it's not listed anywhere. It's not a real number; I said I did it in my head, it's easily 2 billion, please don’t tie a timing to it..

We will take our next question from Nick Yulico with UBS. Please go ahead. .

Just want to ask you sort of latest thoughts on apparel exposure of malls and if I looked at -- I see as you give stats of 55% of mall GLA is apparel, I'm sure yours is lower than that, I think you've worked to reduce some of that mix in your malls.

But the question I think is whether you and the industry can bring in enough tenants they aren’t apparels to replace that square footage if apparel continues to shrink on in line space. And whether these tenants in other industries are paying similarly higher rents as the apparels retailers leave that space.

I know furniture stores is talked about as growing demand, they take a lot of space the question is do they pays as much rent as the apparel tenants are leaving?.

So when you will hear that, that’s a good question, so when you hear that 55% number what you think that applies to, do you think it applies to our malls space or you think it applies to the entire shopping mall, including the departments stores?.

That’s specifically just non-anchor inline space. .

That’s a baloney number, it's so false it's unbelievable. Never was true, never close to being true.

I think the highest, Bobby -- I think 20 years ago maybe apparel was close to 40%, but today its well under 30% in our portfolio in terms of in line space, am I wrong about that?.

I don’t know the exact number, it's also how are they defining apparel, are they defining as apparel, accessory shoes, where it's in their product category. [Multiple Speakers]..

I guess the question is still, if apparel needs to shrink in the mall and other tenants need to take that place, do the other tenants coming in, are they able to pay the same rent as apparel?.

Since nobody will believe my predictions, all I can do is look at history. History would tell you that 10 years ago the following names didn’t have a lot of square footage and today they are some of our best tenants at our mall, Apple, Tesla, Microsoft, countless numbers of restaurants that we have that draw traffic, great names.

And that will be the way of the future. It all -- let's do remember, I know you all think of us as a mall company, but we are a real estate company. And so even if the mall business model changes, if you have fundamentally great real estate, it will be occupied and it will be healthy and it will be vibrant..

That concludes today's question-and-answer session. I would like to turn the conference back over to today's presenters for any additional or closing remarks..

Thank you. I just would like to say that six months ago I think on one of the earnings call, I made a big point of saying I feel your pain, and I don’t want any of my remarks today to indicate that I am not emphatic. But I am done feeling your pain.

Look our view of the future is very positive, we are in rough waters, we see a significant disruption between not only our view, but some very smart global private investors of the fundamental underlying value of our business and the value of our real estate compared to the way the public markets have seen the values and to some degree we have taken advantage of that.

So I thank you for your participation and we look forward to communicating with you over the balance of this year. Thank you..

This concludes today's call. Thank you for your participation you may now disconnect..