Jean Wood - Vice President, Investor Relations Art Coppola - Chief Executive Officer and Chairman Tom O’Hern - Senior Executive Vice President and Chief Financial Officer Robert Perlmutter - Senior Executive Vice President and Chief Operating Officer John Perry - Senior Vice President, Investor Relations.

Craig Schmidt - Bank of America Michael Bilerman - Citi Alexander Goldfarb - Sandler O’Neill Jim Sullivan - BTIG Michael Mueller - JPMorgan Todd Thomas - KeyBanc Capital Market Vincent Chao - Deutsche Bank Wes Golladay - RBC capital Markets Haendel St. Juste - Mizuho Rich Hill - Morgan Stanley Greg McGinniss - UBS Tayo Okusanya - Jefferies.

Good day and welcome to the Macerich Company’s Second Quarter 2017 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Jean Wood, Vice President of Investor Relations. Please go ahead..

Thank you everyone for joining us today on our second quarter 2017 earnings call. During the course of this call, management may make certain statements that maybe 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 Investors 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 and welcome everyone. The second quarter reflected continued solid operating results as evidenced by most of our portfolio’s key operating metrics. For the quarter, FFO was $0.98 per share compared to $1.02 for the quarter ended June 30, 2016.

This was above our guidance range and above consensus and this was primarily due to the timing of lease termination revenues. Same-center growth and net operating income, excluding straight line rents and SFAS 141 income was up 3.3% for the quarter.

Lease termination fees for the quarter were $9.1 million that compared to $5.9 million in the second quarter of last year. The largest term fees came in from Bebe at $3 million and Sperry at $2 million.

Year-to-date, lease term revenue is about $12 million, including our guidance assumptions, we revised that up to $17 million for the year but that’s still less than we saw in 2016 when we had actual term – lease term revenue of about $21 million.

The gross operating margin for the quarter was 70.4%, up slightly compared to 70.3% in the second quarter last year. Bad debt expense for the quarter was $2.5 million, up somewhat from the $1.7 million we incurred in the second quarter of last year.

Year-to-date, bad debt expense is about $4.2 million and accordingly, we have increased our guidance for bad debt for the year to $6.5 million, up from $5 million. Here in the second quarter, average interest rate was 3.6% and that compared to 3.52% a year ago. Bringing out the balance sheet, the balance sheet continues to be in good shape.

At quarter end, debt-to-market cap was 46%. Interest coverage ratio was a very healthy 3.3x. The average debt maturity, just under 6 years, which is very strong and should improve over the course of the year as we finish financings in the second half of the year.

Forward debt-to-EBITDA, 7.8x and our floating rate debt was at 17% of our total debt but this – based on our financing activities in the second half, this should go down to close to 10% by year end. We plan to be very active in the financing market in the second half of the year.

Rates are still very low and strong malls and financing market is good – the financing market is good for strong malls. The following financings planned on two unencumbered assets, Green Acres and Broadway Plaza and we also plan to refinance in the second half of the year, Freehold malls and Santa Monica Place.

Total excess proceeds we expect to see from those 4 transactions is about $600 million. In addition, we are going to be at least considering financing some of our unencumbered assets in the second half of the year. Those assets could amount to as much as an additional $300 million of excess proceeds.

So all-in-all, it could be close to $900 million and it’s anticipated this time that most of the excess proceeds if not all, will be used to pay down or pay off our line of credit. We were also active during the quarter on our share buyback program. We purchased an additional $40 million worth of stock, at an average price just over $59.

Year-to-date, our buybacks have totaled $181.7 million and close to 3 million shares have been repurchased, or roughly 2% of our shares outstanding. In our earnings release yesterday, we reaffirmed our previously provided FFO guidance in the range of $3.90 to $4.00.

There’s more detail in the 8-K that was filed last night regarding the assumptions in addition to the 2 that I just mentioned in my earlier comments. And now, I’d like to turn it over to Bob to discuss the leasing environment..

Thanks, Tom. Our second quarter produced leasing results, which reflect both the current retail environment and the high-quality nature of the company’s portfolio. Sales for our centers increased to $646 per square foot. The trailing 12-month leasing spreads increased to 18.5% from the first quarter rate of 17.5%.

We are finding our top tier centers continue to have the greatest impact in the portfolio performance. Average rent per leases signed during the trailing 12-month period was $58.08 per square foot, up from the first quarter rate of $56.93.

During the second quarter, a total of 745,000 square feet of leases were signed, bringing total activity during the first two quarters to just under 1.3 million square feet. Average term for leases signed in the second quarter was 5.9 years, which was an increase over the Q1 average of 5.2 years. Occupancy at the end of the second quarter was 94.4%.

This represented a 60 basis point decrease on a year-over-year basis and a 10 basis point increase from the first quarter. Our temporary occupancy ended the second quarter at 5.7%. Portfolio sales were $646 per square foot. This represented a 3.2% increase on a year-over-year basis.

On a same-center basis, sales were up 2.5% and sales weighted on an NOI basis were $754 per square foot. Bankruptcies, to-date, there have been 12 tenant bankruptcies affecting 146 stores, containing 551,000 square feet. Of this amount, we are forecasting that 65 stores containing 228,000 square feet have or will close.

While most of these closures have occurred prior to the end of the second quarter, there will be some additional store closings in the third quarter. Average sales for these stores were approximately $250 per square foot. Merchandise mix.

During our first quarter earnings call, we were asked about apparel’s position within the merchandise mix of the centers. This is a common question we receive from the investment community.

Specifically, there is a general belief that the square footage dedicated to apparel has declined and will continue to decline further in the coming years, causing additional vacancy and pressure on rents.

While there are clearly significant changes in the apparel formats presented in the shopping center, the category remains a significant contributor to not only the existing tenant base, but also in regards to our annual leasing activity.

While the industry uses different definitions for apparel, when we speak of the category, we include athleisure, children, unisex, men’s, women’s and intimates. In 2011, apparel represented 40.2% of the non-anchor area. At the end of 2016, apparel declined to 37.8%.

The real change that occurred during this period was the format being presented and the impact caused by the fast fashion retailers. During this 5-year period, the square footage occupied by apparel stores under 10,000 feet decreased by 12%. Almost half of this decline is attributed to the bankruptcies incurred since 2014.

The dislocation in apparel brands has been the transition from smaller traffic-based stores to larger brand dominant presentations. To us, this makes sense as building a retailer’s brand with larger presentations in dominant centers fuels online and off-price distribution points.

During the same 5-year period, there were other changes in the merchandise mix at the properties. We believe this represents the changing preferences of our consumers. Not surprisingly, square footage represented by restaurants increased by 7%, theaters grew by 17% and home furnishings expanded by 14%.

Our conclusion is the shopping center tenant base is transitioning from smaller, weaker apparel formats, who historically were dependent on foot traffic into larger, more dominant global branded retailers. This competitive change, combined with online commerce is causing dislocation in the marketplace.

Longer term, we see the apparel category evolving, led by retailers presenting larger formats with stronger brand identity and better financial resources. This should bring more stability into the apparel tenant base.

Since many of the larger format retailers are expanding from smaller store fleets, we continue to believe the new store activity will be disproportionately higher in the better quality centers.

These changes in the existing tenant base, combined with growth in digitally native retailers and the introduction of new uses catering to changing lifestyle desires of our customers, will provide the support in the near-term to maintain our high occupancy levels. And with that, I’d like to turn it over to Art..

Thanks, Bobby and thanks, Tom. As you can see from our numbers, we continue to put up very strong operating results, which is a testimony to the great business that we have and the great locations that we have.

Since our last call, there has been a daily, if not sometimes hourly, the rise of headlines predicting the death of great retail locations, the death of the mall is a common one and the death of brick-and-mortar based retailers. And from that, that is very painful to look at that.

And I do share the pain of many when you look at those headlines, especially when you have conviction that they are not accurate.

But I have absolutely no empathy for the shorts in the social media that are motivated for their own reasons to help to create this fake news in this barrage of headlines that incorrectly states where the retail business is and where the retail business is heading.

It is very painful obviously for many of us and many of you as shareholders, to see the dramatic differentials that have been created between the true value of our businesses and the value that the markets attribute to them.

And we feel that pain every year, given that senior management at Macerich, over half of our compensation is directly tied to the performance of our shares. But again, I have no empathy for the incorrect conclusions that the mall is dead and that it is in late innings or demising.

Since that is my conclusion, let’s go ahead and just revisit what our model is and what are the dynamics of the future of our model. Our portfolio is comprised of owning the single best retail location in some of the best gateway markets in the United States.

Our properties are, in fact, the last mile of retail distribution in some of the most densely populated and affluent markets in the U.S. The value of this model, I think to some degree, was enhanced and validated through the announcement in the last quarter that Amazon is going to stake a claim to that last mile with their purchase of Whole Foods.

We own the number one gathering place for town square in each of these great markets. Rents and demand for our centers have been strong. Let’s look at the dynamics of supply and demand that dictate rents for any form of real estate.

On the supply side, it is true that there will be virtually no new malls or significant retail centers built in any of the gateway markets that we own. It is however also true that over the past 15 years, there has been a new form of supply distribution channel that has emerged and that comes in the form of e-commerce.

In spite of that supply and that opportunity for distribution in commerce to take place away from our great retail centers, over the past 15 years, we have generated ever-increasing rents, ever-increasing sales productivity and maintained very high occupancies, all while enhancing the merchandise mix and the attractiveness of our properties.

So on the supply side, it’s constrained from a brick-and-mortar viewpoint and even with the emergence of the e-commerce channel, our properties have performed very well, because they are in the last mile in the middle of great markets.

Now, let’s look at the demand side and really again, rents are a function and occupancies are a function of supply and demand. It’s true that we are in a season of restructurings of some of the legacy retail brands and the demise of some of these retail brands. This is normal.

This happens and has happened in the history of retail for hundreds, if not 2,000 years. Why have these brands had to restructure or why have they faded away? In some cases, it was too much debt. In some cases, it was a failure for them to become omni-channel.

In other cases, it was simply boredom with the shopper, who no longer felt that the brand stand – stood for anything and that again is normal. It doesn’t take e-commerce to kill these brands.

Let’s not forget that brands such as Montgomery Ward, Woolworths and you know all of the names, they all died in the past because of boredom and that was well before the years of e-commerce, as you look at it.

In terms of where is demand coming for our properties going forward? There is obviously food that is an ongoing and terrific addition to our centers, experiential retail that is coming to our centers and that we will be adding dramatically to our centers.

The real source of demand going forward for us is going to come from vertically integrated digitally born brands. The same e-commerce channel that many are afraid is going to kill brick-and-mortar today, is currently incubating and creating the great brands of tomorrow.

Brands like UNTUCKit, Ministry of Supply, b8ta, INDOCHINO, Athleta, Blue Nile, Bonobos, Warby Parker, Monica + Andy, Interior Define, Allbirds, Madison Reed the list goes on and on.

The digital commerce, while it has hastened in some degrees, the demise of irrelevant brands that have lost their way with the shopper, is most importantly incubating the creation of new businesses.

The cloud, if you will, is making the birth of new brands far more efficient than the old model where people had to create an idea and then go out and take the risk of testing that idea with a series of brick-and-mortar.

While we are on a sea of tough headlines, our view of the future for our great gathering places located in the last mile in dense demographic markets is very bright. Digital commerce is not a threat to our model. It is a great friend to our model.

And again, as I indicated, while it may hasten the demise of boring retailers, that is far overpowered by the creation of new brands of vertically integrated digitally-born brands.

These are brands that create a sense of community and loyalty in the digital world, before they decide to open their first store and when they do begin to round out their omni-channel strategy, they’re able to attract shoppers that are already following their brand and that come and visit their brand with a sense of purpose and intent.

With that, I would like to open it up for questions..

[Operator Instructions] We will take our first question from Craig Schmidt with Bank of America..

Great. Good afternoon and good morning to you. I guess, just focusing on Fashion Outlets of Philadelphia, I guess, it opens next year, 2018.

I just wonder, how will that rollout will it have the grand opening where everything opens or is there going to be opening gradually throughout 2018?.

We haven’t announced the hard opening date. That’s really more of a placeholder at this point in time. Usually with the opening of any center, in terms of the local markets, that’s done generally about 6 months before the hard opening date. So that’s to be determined at this point in time, Craig..

And would you say just given some of your comments that the Fashion Outlets of Philadelphia will have obviously a food component, but also a strong experiential component?.

It will, yes..

Okay, great. Thank you..

Thank you..

And we will take our next question from Christy McElroy with Citi..

Hey, it’s Michael Bilerman. Hey, Art..

Your voice has dropped, Michael..

Yes, thank you. I can channel Christy, if you would like. So I had a question about Ontario Teachers, just from the standpoint of – I assume as a board member and your largest shareholder, have been very supportive of your actions to do share repurchase. Last summer, last August, you gave them the waiver to go up 20%.

They are basically at 15% at the time, I think in part driven by the desire as you were buying back shares to allow them to move up gradually. But also you had expressed at the time that they themselves had expressed the desire to accumulate more stock, given where they had been buying it previously.

But since then, they haven’t bought any shares, the last – they did the big $500 million purchase in May ‘15 at a price of like $78 adjusted for the few specials, but nothing since. And so maybe you can just take us – and they are big owners in Canada of retail, so they understand the retail environment.

So we are just trying to keep together why haven’t they taken advantage of the market like you have to go up to the right that you gave them to, up to 20%?.

Well, to some degree, as the company is buying back shares obviously they are indirectly taking advantage of that also in terms of their own ownership increasing. Look, I can’t speak for them. I am not going to speak for them. They are a big believer in the company, a big supporter of the company. By coincidence, we are actually in Toronto today.

We move our board meetings around and periodically, we have one here and we will be seeing those folks later on today and tomorrow at our board meetings. They are a big supporter of the company, big believer in the strategy. What they do or don’t do in the open markets, I don’t think reflects anything around their sentiment..

But are they precluded at all from having bought any shares, just for your largest shareholder to have so much knowledge and where the value of the shares are today, almost 20% below where they originally weighted average bought their stock, it’s just something is missing from that equation, especially because when you talked about the waiver last summer, you said in part it was driven by their desire to want to move up similar to the year prior?.

Well, again, I think we can look at the glass being half-empty or half-full. I would say the other flipside of that is that throughout all of this, they have maintained their ownership in the company and have decided not to sell any shares, because they believe in its future.

And I don’t want to be argumentative with you, Michael, but I also don’t want to speak for somebody that I can’t speak for..

Right. Okay, thank you..

Thank you, Mike..

And we will take our next question from Alexander Goldfarb with Sandler O’Neill..

Hey, good morning up there. So, my question is you guys had spoken previously about funding stock buybacks with dispositions.

I didn’t see any dispos this quarter, so sort of a two-part, is one, what you guys have the guidance for stock buybacks and two, Art, what the appetite is out there today for B malls, where cap rates are and what you think transaction market could be for selling assets and if that will be used going forward to fund buybacks versus using refinancing proceeds?.

Well, I think – I don’t see us funding buybacks with debt, period. And the buybacks – generally, we have said that for this tranche of the $500 million authorization, we anticipate that, that will be match-funded, not perfectly, but you know, over a short period of – window of time through these dispositions of non-core assets.

Now, we did sell two non-core assets earlier this year that generated roughly the proceeds that were used for the purchase of shares. I do anticipate other non-core assets maybe sold over the course of this year and into next year.

The buyer – there was news in the Chicago Press that we may have been selling an office building that we own there that’s contiguous to North Bridge mall.

We choose not to comment on acquisitions or dispositions until they are closed, but given that the buyer went out and leaked that information, I guess, I will confirm that we are under contract to sell along the 500 North Michigan and that again, would be something that could be used to fund stock buybacks.

We are not currently entertaining the idea of selling what you would call B malls. We do have non-core assets, whether they be land or other types of assets, community centers that we will go to use to fund stock buybacks and that’s what we really see as the source going forward..

But Art, is the lack of B mall sales, is that because that market has changed from where it was maybe 6 months ago?.

I am not even paying attention to it. That’s why..

Okay, thank you..

Thank you..

We will take our next question from Jim Sullivan with BTIG. Please go ahead..

Thank you. Two questions. First of all, Tom, you had talked about the financing plans for the balance of the year. I wonder if you could just kind of update us.

I think you characterized the market as good, but if you could talk a little bit about loan-to-value ratios, whether they are continuing to be stable to what they have been in the past and whether all of this public negative narrative is having any impact on how lenders approach the market?.

Jim, a lot of what we have done and will do in the second half of the year is life company financing. Their underwriting has typically been fairly conservative, but I haven’t really seen that change dramatically. They realized the quality of the tenants and the quality of the real estate in A quality malls and they have for many years.

So, they continue to be very focused on getting transactions done on A quality regional malls. So, we expect that to continue. The spreads have not widened. I mean, we are still looking at quotes for 10-year deals under 4%. And typically, our borrowing level is 50% to 60% loan-to-value and we have not seen that change.

We haven’t seen any restrictions push down its limits on the amount of proceeds, because that’s how we really target anyway and we are going to continue to stay in that range.

And there may or may not be a strong market in CMBS, but we do typically get quotes on everything we do there and the market does seem to be there as well for A quality regional malls..

And I would just add to that, Jim.

Look, the life companies have been students of this business for a long period of time, and for the 40 some years that I have been doing this and they have revered and held great regional malls as being one of the top two asset classes that they want to invest their debt capital in to fund their businesses and their obligations.

And that has not changed and I don’t know if we have mentioned it, but we have one property that – a good mall, solid citizen for us that when we recently exposed it to the debt markets, a couple of life companies stepped up and offered us debt at a level in excess of $400 million.

What we will actually take in proceeds will be determined by being somewhat rate sensitive also.

So, these are big checks and bit votes of confidence from people that don’t have an equity upside and have all the downside if you think about that they are worried about the business model and they are sitting there very comfortable writing very large checks that are supported by the assets that are in the heart of this portfolio..

Okay, thanks for that. Second question for me regarding Scottsdale Fashion Square, I believe you are in the process of trying to get permission for kind of the second phase of an expansion, densification of that site and I believe that included a building height of up to 150 feet.

I wonder if you could share with us what alternatives you are thinking about here for Phase 2?.

Well, I think one of our core competencies, Jim, is getting entitlements in communities and given that we are usually the largest and most important taxpayer in business in every one of the communities that we do business in, we have really good relationships with local governments.

And when we look at the – we have excess land around a 2 million square foot retail center, we come to the conclusion that, look, we have enough retail and when we have had the opportunity to add more retail there, it tends to be more experiential.

So, when we recently expanded Scottsdale, we added a big theater complex as well as a big sporting goods and then we still have a ton of vacant land that we have recycled and recaptured. It is now no longer contiguous to just the typical suburban mall, it is contiguous to what has become the urban core frankly of the entire state of Arizona.

So, the demand for density, either from residential, hotel, or office, each of which we think enhances a sense of place around our retail centers, similar to what we did at Tysons Corner, is very high.

So, the first step is simply to get your entitlements and the fact that we have asked for that level of entitlement I think reflects the fact that there is demand to fill a building that would occupy that size. After we get the entitlement, then we will go ahead and proceed and put further color and definition over what the uses will be.

So, that’s pretty much where we are at. It’s a great location and one of the attributes of these centers is, especially as time has gone on, is that the opportunity to densify them is there, there is great value to be achieved from that and we have had a great experience in seeing that happen at other properties..

Okay, good. Thank you..

Thank you..

We will take our next question from Michael Mueller with JPMorgan..

Yes, hi..

Hey, Mike..

I was wondering, are you expecting any material impact on Danbury from the Norwalk development or are you thinking it’s just too far away?.

I am not going to comment on that. We are getting strong retailer demand at the same time that they are likely doing their leasing. So the retailers are voting with their signatures that they want to be at Danbury.

We have a significant number of additional uses and retailers – all retail uses, I guess, I would say that we are talking to about adding them to Danbury. So look, Danbury is a great center. It puts up great rents, it puts up great sales productivity. And anytime you have new supply come in to a market, you’re going to have some that impact.

I think the people that study where the sales will come from and talking to the department stores that are going to go there and you think about where the transfer is going to come from, while Danbury undoubtedly, will feel some of that, I think there are certain other centers that are not owned by us that might feel more of it and certain other markets that might feel more of it..

Okay.

And then looking at the redevelopment page, what are the triggers that you are looking for to move forward with something in Paradise Valley and Westside?.

Each of them, I think are going to be triggered by recapturing a department store location and once that’s done at each of them, you can kind of kick into the next gear. So we will be reporting on that. And look, we are not in the mood to overpay for the department store locations say a Paradise Valley, for example.

In the meantime, we are essentially land banking the property. It’s generating cash and – but at this point in time, I would see each of them, frankly as non-core retail assets, but both are great real estate in great markets..

Got it. Okay, thank you..

Thank you..

We will take the next question from Todd Thomas from KeyBanc Capital Markets..

Hey, Todd..

Hi, thanks. Good afternoon..

Just a question on operations, I think there was an expectation that occupancy might have fallen in the quarter, it was actually up slightly sequentially and the company historically has taken a little bit of a harder stance in negotiations with retailers than many peers.

Can you just speak to whether you are approaching discussions with retailers any differently than you have in the past, whether that strategy around balancing occupancy and rent has changed at all and just given the current environment?.

Todd, this is Bob Perlmutter. I think our approach is really unchanged. Again, as we’ve said in the past, we believe we are very high-quality centers. We believe in looking at the centers on a long-term basis, not on a short-term basis. We don’t believe investing in retailers unless we think they will be successful long-term.

So one of the comments that I noted is when you are looking at these occupancies, recognize that there is some store closures related to bankruptcies and terminations that are still going to hit in the latter half of the year, which will impact the occupancy. And the other point is that temporary occupancy went up slightly in the quarter as well.

So part of that is a change of mix where, again we are not rushing to fill these in spaces unless we think we have the right tenant at the right economics..

Okay.

Do you think you can sustain or grow occupancy into the second half of the year given those additional closures that you are anticipating or do you think you will take a step back and what about leasing spreads in the coming quarters?.

As we have said before, we think the leasing spreads have been pretty stable. And looking forward, we think they will remain stable. In terms of occupancy, my guidance is that the occupancies maybe flat or down slightly depending on the bankruptcy and closures..

Okay, thank you..

And we will take our next question from Vincent Chao with Deutsche Bank..

Hey, good morning everyone. Tom, just a question on the guidance, the 3% to 4% same-store, I am just curious it does seem like there is a headwind from a lease termination perspective given your updated guidance in sort of the first half, back half kind of numbers.

I know not all of that flows through same-store, but I was just curious, what are the major offsets to that headwind other than obviously the leasing environment?.

Well, we include lease term fees in our same-center, Vince, so I would call it a tailwind, not a headwind. We do think we are going to get some more of that flow through in the third and fourth quarters as evidenced by our increase in guidance. And that’s just part of the process that we go through. It’s not a terribly unusual year for us.

2016, we had $21 million of lease term fees. It fluctuates anywhere from $12 million to $22 million, $23 million, so we are kind of in the middle of that. And the one thing we do have – the second half of the year, we are not going up against these tougher comps as we were in the first half of the year.

That being said, we do have some space to lease, there is a little bit of pressure on the occupancy level, but all those things kind of balance out to where we are today and not inconsistent with the guidance we gave in the beginning of the year..

And maybe I need to follow-up offline, I am just looking at the first half lease terminations, I think were $12 million, at least about $5 million in the back half.

I think last year, you had about $12 million in the back half?.

That’s right, last year was more back end weighted, that’s correct..

Right.

So wouldn’t that be a drag on same-store NOI this year in the back half?.

On the second half, sure, but this is what helps accelerate us in the first half, but we are also going against weaker comps in the third and fourth quarter. We had a growth rate in the first quarter last year, 7.5%, we had a growth rate of 6.5% in the second and the growth rate slowed in the second half of 2016.

So, we are going against easier comps..

Okay, okay. And just maybe a different topic, I thought I heard in the discussion around which formats are sort of growing and obviously apparel has been shrinking a little bit, theaters was I think in there up 17%, I don’t want to over-read let’s say any one data point, but AMC had a pretty weak quarter.

I was just curious how you’re feeling about theaters in general? If you’re willing to invest in theaters at this point or is that something that’s less desirable at this point?.

Look, adding great multiplex theaters to our properties, has been – has resulted in great results for us across the board. I don’t regret adding a first-class multiplex to any one of the properties that we’ve ever done it to.

One of the things that’s driving very dramatic growth at Cerritos in the sales productivity has to be the new multiplex that replaced the smaller format that we put into place, and we’ve got demand from theaters at other locations when we recapture, either, say, Sears locations through our – where we have the rights to recapture, we have a number of those locations that have demand for theaters.

Will we be prudent, in terms of how we make those theater deals and not invest too heavily in the building and maybe lean more heavily towards the idea of ground leases or modest – the lack of or modest investment. I’d say, yes.

But you know, we’ve been very happy with the traffic that comes from theaters and what it does for the properties in some of our great centers.

Now having said that there are other uses that also draw big traffic and we’re currently in deep conversations around adding, in the beginning, two Lifetime Fitness Centers to our portfolio at 1 in Arizona, and 1 in the Bay Area. And the reason that we’re attracted to that is first of all, don’t get confused by the word fitness.

When I say Lifetime Fitness, it’s really a club and it’s a club around health and beauty and it’s a place to be.

And it draws a great customer in terms of the demographic of the members that they bring, frankly, the disposable income of many of their members is actually higher than our shopping base and it brings an element of traffic to the property that could easily generate hundreds of new trips – hundreds of trips per day to our property.

And generally, the nice thing is during hours that are not necessarily peak shopping hours, so it’s a very complementary, and it’s a traffic generator.

So, look, I put theaters into the category of being a traffic generator, and they generate a lot of traffic and we get cross shopping that obviously enhances the food and other uses as a result of that. I would look at the addition of Lifetime to these first couple of properties and I believe others with us, to be in the same category.

And there will be other categories that we will use to generate traffic. There are a number of new experiential type of retailers that want to be in our centers, including virtual and augmented reality retailers, or uses that would like to be in our centers. The great thing about them is they generate traffic. It’s something you can’t do at home.

You have to come to the property, and you can only do it – and by doing it there, it’s a better experience and people want it and it gives people a reason to gather and that’s what we own, are gathering places..

Okay, thank you..

We will take our next question from Wes Golladay with RBC capital Markets..

Good morning, everyone.

I will stick with that topic in the prepared remarks about the – seems like you are calling for the tenant base to turn a little bit as the new concepts come in, I am wondering if you had a time horizon on when everything will be back to normal levels as far as tenant turnover?.

No. But I do have a baseball analogy for you. Late innings through the ideas that are dead and no longer of interest, it is the top of the first inning for the vertically integrated digitally born brands that are in our – that are coming to our centers but more importantly, that are going to come to our centers.

It’s a new world and the new world is so much more efficient than the old world. It’s like when the cloud came into being and it made it easier for technology and other businesses to be able to form, because they didn’t have to all build their own infrastructure. Well the cloud, which really enables e-commerce, creates a breeding ground for brands.

And again, I want to emphasize the word brand. Look, retailers that are resellers of other people’s merchandise tend to be at risk from commodity pricing that can occur at, let’s say, Amazon or Walmart, but brands that stand for their own and brands that create their own sense of social community and loyalty and, in some cases, subscription.

Those create a following that when they open a store and trust me, every one of them intends to open brick-and-mortar locations because every one of them knows what that does in terms of enhancing the overall experience. And they know that their shopper – consumer wants it. When that happens, it brings shoppers that come with intent.

So it’s not like the old days when a store or somebody would dream up a new retail idea and then go roll it out and hope the people came.

These are brands that have already got a proven sense of loyalty and community around them so that when they open, it’s a pretty sure thing that they’re going to be very successful, they’re going to drive traffic and that it’s going to enhance their overall omni-channel strategy.

So we’re on top of the first inning of the new brands coming to these retail locations. And when they come to brick-and-mortar, when you talk to them, and I spent a lot of time with them, in the beginning, I said – I wondered how they would react about saying I’d like you to come and be in our mall. And I didn’t get any resistance.

And for those that would say, I don’t want to be in a mall. Then the next question I would ask is I’ll say, alright, fine. Do you want to be in this city? Yes, okay.

Now do you want to be the best location in the city by a landlord that will support your business with parking, clean common areas, control the co-tenancy around you and market your business along with the others, would you like to be in that environment instead of a standalone facility with no support from anybody? And again, the answer is yes.

So we are in the early days, but as this hand plays out, I am absolutely certain that it will create the next generation of great retailers and most importantly, it is a far more efficient way for retailers to be born..

Okay. And real quick on the omni-channel, do you see more of these omni-channel retailers offering goods cheaper if you pick up in store, I mean obviously sell some of the last mile distribution, but also you get that incremental spend.

I am just curious why more people do not offer discounts when you pick up in the store?.

I don’t have an answer for you on that, I am sorry..

Okay, thank you..

Thank you..

And we will take our next question from Haendel St. Juste with Mizuho..

Yes, good morning out there. So, a few for you here, Art.

First, I guess, can you talk about the decision to switch the focus of Fashion Outlets in Philly to more of a full-priced focus versus prior plans that were a bit more outlet in nature? And can you talk a bit about any expected impact perhaps on returns?.

What was the second half of that question?.

Returns.

Any impact on the returns?.

Any impact on our returns, the return, rate of return. I am sorry, I was having trouble hearing what you said. It’s simply a question of demand. We unexpectedly – as we are marketing it to the outlet community, found traditional retailers say, wait a minute, I want to be there too. And it’s just a function of demand.

And they were willing to step up and pay the appropriate rent and it’s a quality problem. There are some of these retailers, frankly, that are saying to us, we think this is the wave of the future because you’re going to have a mix of some full priced, some outlets, some entertainment, some experiential, who knows.

But the quality side of the answer – of the problem would also be that the full-priced tenants that are going to be put in there, which is unusual, is just a function of demand and they are pushing aside the other uses for being there by stepping up to the plate and paying more and offering to put in great locations, which is what we want..

Got it. Alright.

I also noticed you were pushing back expected delivery of your Fashion Outlets in San Francisco back 2 years? Curious what’s causing the delay? Is it market project specific or maybe is there anything to read into perhaps how you are thinking about outlet developments?.

No, no, no, we covered this on the last call which maybe – you weren’t a part of.

And we explained in great detail what was going on there, but it’s simply a function that we are part of a master plan community and have a partner that is the master planner and – it’s not unusual when you are master planning hundreds and hundreds of acres in the heart of San Francisco that things could get pushed aside and infrastructure delivery and things like that..

That’s right. Alright. So, one last one, if I may. One of your non-mall retail peers this morning announced a JV with a platform with extensive ties to the Latino community to focus on that underserved community.

So I was curious given your portfolio footprint having a lot of West and Southwest is that something you have actively considered or are actively considering?.

We are very sophisticated in our knowledge of trading in Latino markets. I think having a strategy of focusing on properties that are located within Latino markets is a brilliant strategy.

We actually had a program a number of years ago with its own marketing team and its own management team and its own leasing team that was called Vanguardia that was focused primarily on that, and it resulted in very good operating results.

But right or wrong, while we were generating nice cash returns for whatever reason, the sales productivity, including the fact that there are certain cash transactions involved in those centers also, that we were reporting, didn’t really – was not being appreciated enough by the Street.

So we thought about enhancing our presence in that business line and just rightly or wrongly decided against it and actually started exiting some of those properties. So, Panorama Mall, for example, that we sold was in a very dense Hispanic Latino market. I think that’s a great strategy.

Look, it’s the first or second largest demographic that’s growing in the United States. It’s a great shopper and I applaud the strategy.

It’s just – we did it and we’ve had some very good success with it and we know how to market to that ethnic base and we’ve done very well with it, it’s just – it’s not our core business, we said look, is that our core business or is Tyson, the Queen’s, Brooklyn, Scottsdale Fashion Square and Santa Monica Place, or is that our core business? And that’s where we focused..

Alright..

And we will take our next question from Rich Hill with Morgan Stanley..

Hey, good morning, guys. First question, just digging into the numbers a little bit, I see other rental income looked like it declined to $12.984 million in 2Q from $13.873 million at the prior quarter, that’s despite lease termination fees increasing pretty significantly as you noted.

So maybe you can give some color as to what declined over the quarter to offset that lease termination income?.

Yes. Rich, lease term revenue is not in other income, it’s in rental income. So it’s not in there. Other income is things like advertising income, sponsorship income, parking income, things like that. So, it’s a relatively minor decline in that category can be lumpy, but lease term revenue is in rental income..

And we will take our next question from Nick [indiscernible] with UBS..

Hi. This is Greg McGinniss on for Nick.

So curious about your tenant watch list, how has that changed since the beginning the year and what’s your expectation in 2018?.

This is Bob Perlmutter. Obviously, a number of the bankruptcies that occurred in ‘17 were on that watch list. The watch list is clearly at a higher than it’s been than it’s been 3 or 4 or 5 years ago.

So there’s still a number of people on the watch list – it’s still fundamentally the same reasons they’re on the watch list whether it’s poor financial and capital structure, whether it’s, as Art mentioned, boring concepts that aren’t keeping up with their competitors.

What we’re finding is in the most recent set of bankruptcies that occurred in the second quarter, most are being restructured, so they’re getting their capital structure right, which is good, which lessens the impact. So we still feel like there’s a lot out there.

We don’t necessarily feel that it’s growing but we don’t necessarily feel that it’s going away. And I think over the next 6 to 12 months, we’ll have more clarity on that..

And we will take our next question from Tayo Okusanya with Jefferies..

Yes, good morning out there.

Any update in regards to the Seritage JV?.

No, we are working with our partner in terms of figuring out do we want to recapture part of the amount that we have the ability to recapture or do we want to wait to recapture the whole thing, we have got a number of development plans that were working closely with Seritage on, and we’ve got some pretty exciting ideas.

But as we focus on a specific plan, and we like the plan and we have made the appropriate arrangement to recapture with Sears, then they’ll be announced, just like any other project but the partnership with Seritage is a hand-in-glove planning exercise. And you know, look, I’ve view this type of situation as I’m getting paid to dream.

I’m getting paid rent right now while we’re coming up with great ideas to make money off of those boxes and that acreage and to also enhance the property to which they are attached..

And that concludes today’s presentation. I would like to turn the conference back over to Art Coppola for any additional or closing remarks..

Thank you very much everyone and we look forward to seeing you in the weeks and months to come and reporting to you through the balance of this year. Enjoy the balance of your summer. Thank you..

And once again, that concludes today’s call. We thank you all for your participation and you may now disconnect..