Macerich Company Executive Insights: Guidance, Department Store Resurgence

On Wednesday, Macerich Company (NYSE:MAC) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Guidance

Christy McElroy – UBS: Tom I just wanted to go back to your guidance. With regards to the first quarter you guided to roughly 21% of the full year implying the range of $0.64 to $0.66. Can you sort of just walk us through all the different factors that caused the actual results to be much higher than you expected, what was recurring versus non-recurring, and why wouldn’t that then translate into a higher full year forecast?

Thomas E. O’Hern – SEVP, CFO and Treasurer: Well, there is a lot of factors, Christy. One in particular is, we ended up with $3 million or so of lease termination revenue and that’s a number that frankly every year is a guess and we look back on history and we’d forecast $12 million, but we hadn’t forecast any of it coming into the first quarter. So, that’s a piece of it. We had slightly higher SFAS 141 income as a result of the some of the acquisition activity that we’ve had over the last nine months and also some straight lining of rents, as a result of tenant changes went our way. So, there are few pickups there that may not be recurring. Again, remember when we gave guidance we also indicated that we’d have asset sales in the range of $300 million, $350 million and we factored in some dilution there. It’s too early to conclude one way or other on how that will go. We’ve got roughly either closed or under contract about $100 million of those sales. So that’s another part of it. We’ve also got quite a bit of financing in the works right now. So, we’ll be in much better position at the end of next quarter to address than we are at the end of just one quarter?

Christy McElroy – UBS: I think you had talked about on the last call, $0.08 of dilution, regarding the asset sales, is that something I guess you’ll revisit next quarter as far as how much solution you’ll ultimately see?

Thomas E. O’Hern – SEVP, CFO and Treasurer: Right, we’ll take a look at all the major assumptions and do an update at that point.

Christy McElroy – UBS: Then you’ve talked about encumbering some of your unencumbered assets. I think $2 billion pool you’ve talked about. Do you have any restrictions on your unencumbered asset base in any of the covenants on your credit line?

Thomas E. O’Hern – SEVP, CFO and Treasurer: No. None, whatsoever, there’s no requirement for unencumbered pool.

Christy McElroy – UBS: Then just with regard to Fashion Outlets of Chicago. Can you talk about how the project economics will work with AWE Talisman, are there any fees being paid to either party? What’s the total project cost and what’s your share of the cost in the construction loan?

Arthur M. Coppola – Chairman and CEO: I think we’ve disclosed that in the past but I’m happy to review that again. Our ownership of the project is 60%, pretty simple ownership today and we will be funding the equity component of the project, the loan is about $140 million and the total cost is around $200 million. We anticipate a double digit cash-on-cash return and we have the right on a formula basis to look at buying out the 40% interest owned by AWE Talisman after a period of time, I think three years after the grand-opening. We’re very, very excited about the project and it’s shaping up to be a terrific project.

Department Store Resurgence

Richard Moore – RBC Capital Markets: Another mall CEO this morning said that there is kind of department store resurgence that he sees going on. Do you see something similar going on as well?

Arthur M. Coppola – Chairman and CEO: All of our retailers – the retail environment is very healthy and that just goes across all sectors, it even includes the national retailers whether they’d be department stores or specialty stores they’ve quit giving merchandise away, and they quit doing it in the fall of 2009 and they gave up chasing sales and started chasing operating margins. So, when you go back and you make a secular change to your business model and you figure out how to make money again then you are going to have a resurgence. So, yes, they are very healthy. All of our retailers across the board are in very good shape pretty much across the board.

Richard Moore – RBC Capital Markets: So, the addition of Neiman Marcus that kind of thing or similar department stores could occur more often in your portfolio you think?

Arthur M. Coppola – Chairman and CEO: It has occurred really on a non-recurring, recurring basis I am sure that we’ve done business. We are constantly recycling and adding and subtracting and repositioning anchor stores. I’d hate to think of how many we’ve done over the past 35 years, but it is a very large number. I’ll bet we have recycled 40% of our anchor space in the last 15 years alone.

Richard Moore – RBC Capital Markets: Then when you think about densification the addition of office space and multi-family had gotten so much attention and kind of resurged again. I mean, do you still find that to be good, in general? I mean are you going to be doing maybe more of that going forward?

Arthur M. Coppola – Chairman and CEO: Right now, our plans are limited to Tysons Corner. So, that’s it for now. But we currently clearly – and we’ve got a great project in the works there and we’re doing it for all the right reasons, it’s adding 8,000 visitors per day to the customer base who will live there or work there that are currently not there. So, it’s going to be great for the mall. We’re making money on each of the components, and we just think that in a transit oriented development, which this is, as the rail comes to the site, that it’s appropriate. It’s going to happen all around you, so you might as well be a part of that and not just an old suburban mall stuck into the middle of a new central business core. So, that’s really what drives it. So, it’s not a panacea to go mixed-use, but when it’s appropriate and you have truly the most appropriate, we have a transit oriented development.

Richard Moore – RBC Capital Markets: Thank you, Art. Then Tom, real quick on the variable rate debt. I think it’s around 50% at the end of the quarter of the debt portfolio, and you mentioned some of the activities you’re doing that will bring that down. Does that take do you think overall back to maybe the 20% level, that kind of…?

Thomas E. O’Hern – SEVP, CFO and Treasurer: I think, Rich, by the time we get to the end of the year, it’s going to be under 20%. Subsequent to quarter-end, we had $140 million of proceeds that came in on Pacific View financing. That was used to pay down variable-rate debt. The Oaks, which I mentioned, is going to go from floating rate debt to fixed, that’s $220 million. The excess proceeds on Queens financing will be fixed and that will go to pay down floating. So, almost every move we make on the financing front is going to be reducing the floating rate debt.

Richard Moore – RBC Capital Markets: Most of these fixed rate loans are probably in the 4% plus range, some sport a 5%?

Thomas E. O’Hern – SEVP, CFO and Treasurer: They are in the low 4s, Rich they are in the very low 4s. I mean I don’t think we’ve even done went over 4 in a quarter lately. So, it continues to be a fantastic environment to be a borrower especially fixed and long-term.

Arthur M. Coppola – Chairman and CEO: I mean you can break 4 you can get into the 3s depending on your term?

Thomas E. O’Hern – SEVP, CFO and Treasurer: Yes, if you went for a five-year, seven-year deal you’d be out of 4% easily today.