The Macerich Company (MAC) Q4 2015 Earnings Report, Transcript and Summary

Welcome to the Macerich Company Fourth Quarter 2015 earnings call. [Operator Instructions]. I would like to remind everyone that this conference is being recorded. I would now like to turn the conference over to Jean Wood, Vice President of Investor Relations. Please go ahead.

Thank you, everyone, for joining us today on our fourth quarter 2015 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 the supplemental filed on Form 8-K with the SEC. These 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, Executive Vice President Leasing; John Perry, Senior Vice President Investor Relations. With that I would like to turn the call over to Tom.

Thank you, Jean. Consistent with the past practice, we will be limiting the call to an hour. If we run out of time and you still have questions, please do not hesitate to call me or John Perry or Jean. The fourth quarter reflected continued operational excellence as evidenced by the strength of our key operating metrics. We saw the successful completion of our joint venture strategy, the completion of a number of highly attractive financings, the reinvestment of capital into our best assets through redevelopment and share buybacks. We will talk about these in greater detail later in the call. We continue to see very significant benefit from our efforts in 2012 through 2015 to sell non-core slower growing assets and redeploying that capital into higher quality, more productive assets. Looking at the leasing activity, we had good volume in the fourth quarter. We signed – on leases under 10,000 square feet, we had 313,000 square feet signed, positive re-leasing spread on a trailing 12-month basis of 14.2%. Looking at mall occupancy, it came in at 96.1%, up 30 basis points from 12/31 of ‘14 and up 70 basis points from our occupancy level at the end of the third quarter. Average mall store base rents also increased to $54.32, up from $51.15 a year ago. FFO for the quarter came in at $1.12 that compared to $0.99 for the quarter ended December 31, 2014. Same center NOI increased by 6.4% in the quarter and year-to-date NOI – same center NOI growth was a sector leading 6.5%. This increase was driven by increased occupancy, double-digit re-leasing spreads, annual rent increases and aggressive operating cost management. Looking at the gross margin at the centers, it improved to 71% for the quarter, up from 68.6% in the fourth quarter of last year. Looking at the year-to-date margin it improved by 250 basis points to 69.3% compared to 66.8% for the full year 2014. Bad debt expense for the quarter was up slightly at $1 million compared to $800,000 in the fourth quarter last year. The average interest rate at 3.6% was slightly higher than 3.48% average rate at the end of 2014. The balance sheet continues to be in great shape. At quarter end, looking at the key balance sheet metrics, debt to market cap was 34%, interest coverage ratio was a very strong 4.0 times, debt to EBITDA on a forward basis 7.2 times. The average debt maturity, and this is after the Arrowhead financing and the closing of the joint ventures, is six years, up significantly from a few years ago. We did a total of about $3 billion in financing in 2015, and within the past quarter, we did $1.8 billion, they could include Arrowhead, 12-year loan, $400 million at 4.05%. Los Cerritos, another 12-year loan at 4%. Washington Square, a $550 million loan, 3.65%, seven years. South Plains, Twenty-Ninth Street also refinanced. So that was $1.825 billion in financings, average tenure of 10.1 years at an average interest rate of 3.94%. In mid-November, we set about to execute on our $1.2 billion of approved share buyback. We engaged an investment bank to do a $400 million accelerated stock repurchase program. At the beginning of that program, we received and retired 4.1 million shares when the plan started, which was November 13, and the balance of the shares were to be delivered based on the average daily volume adjusted price of MAC during the buying period, less a negotiated discount. On January 20, 2016, the ASR program was completed. Effectively MAC bought back $400 million worth of shares at $78.26. We received another 971,000 shares at that time. So this program, the first ASR under the $1.2 billion program retired in total 5.1 million shares. Also since the last call, we had two special dividends that resulted from the joint venture transactions, they reached $2. One was paid in December and one in January. In our press release this morning, we provided 2016 FFO per share guidance, the range was $4.05 to $4.15. The guidance assumptions included same center NOI growth of 4.5% to 5%, which is very significant given that 2015 is a tough comparison year having come in at 6.5%. The acquisition and guidance includes a $330 million of our share of Country Club Plaza, which has been previously announced and also reflects roughly $1 billion of dispositions, which relates to the joint venture interest that we closed in January with Heitman and GIC. The other assumptions are included in the 8-K supplement filed last night. Our NOI guidance for 2016 is consistent with the guidance we gave in early 2015 after adjusting for the impact of the joint ventures. At this point I would like to turn it over to Bobby to discuss the leasing environment.

Thanks, Tom. The leasing activity during the fourth quarter remained strong reflecting the high quality nature of the company's shopping centers. Occupancy increased to 96.1%, which represented a 30 basis point year-over-year increase. Permanent occupancy ended the year at 90.5%, temporary occupancy increased to 5.6%, which reflects the bankruptcies incurred at the end of 2014 and the beginning of 2015. During 2015, a total of 250,000 square feet was converted from temporary to permanent occupancy. Leasing spreads were 14.2%, again indicating strong demand for space in the portfolio. Leasing spreads were strongest in the East and West Coast centers. Average rent for leases signed in 2015 was $57.41 per square foot, this represented a 5.4% increase over the prior year. During the year, we signed leases for approximately 4 million square feet which was a 2.4% increase over 2014. The average lease term for leases signed in 2015 was 6.2 years. Portfolio sales increased by 8.2% year-over-year to $635 per square foot. Comparable center sales increased by 7.6% year-over-year. Sales increases were highest in the West Coast and Arizona centers. And during 2015, sales were positively impacted by: one, high-volume tenants; two, strong categories such as home furnishings, jewelry, cosmetics and athletic footwear; three, organic growth from merchants with strong brands; and four, store closures of underproductive tenants. Tourism. While our portfolio only has moderate exposure to international tourist and luxury business, we have seen certain centers impacted by tourism and the stronger US dollar. Most notable in our portfolio is Fashion Outlets of Niagara Falls whose sales have been impacted by the steep decline in the Canadian dollar. Holiday sales. Most retailers are indicating holiday sales were in line with our expectations. Black Friday sales are being distributed over most of the week starting with pre-Thanksgiving sales. Retailers are also reporting the last few days before Christmas as well as the post-Christmas activity was stronger than expected. Many retailers were promotional to up the entire season, we believe this is likely to increase the strain on those stores under financial pressure. In general, it appears that specialty stores fared better than department stores during the holiday season. 2014 and 2015 bankruptcies. As we discussed during the third quarter earnings call, we expect bankruptcies and rent relief requests in 2016 to be at similar or higher levels than in 2015. This is reflected in our 2016 forecasts. We believe many of these retailers are likely to restructure and reduce the number of locations within their fleet as opposed to liquidate the entire chain. This is likely to impact lower productivity centers to a greater degree. During 2014 and 2015, there were 11 major store closings or bankruptcies that impacted 134 stores or 413,000 square feet within our portfolio. The average rent for these stores was $54 per square foot, they generated sales of $241 per square foot and had an occupancy cost of 22.6%. As of 12/31/15, 66% of the space has been re-leased resulting in a significant upgrade to the merchandise mix, improved sales productivity and a rent spread in the high-single-digits. eCommerce. We are continuing to learn how retailers use their brick-and-mortar stores as a key component to support growth in their eCommerce sales. A number of important trends are emerging. One, the brick-and-mortar stores are integral to the eCommerce efforts. Two, BOPUS, bought online, picked up in stores, is becoming increasingly important to retailers. Three, online sales have a high percentage of returns especially on apparel. Four, physical store sales are reduced by online returns, which reduces reported sales for brick-and-mortar locations. Five, the customers enter the mall equipped with more information from the web than ever before. Six, pure eTailers are migrating into brick-and-mortar stores generating new leasing opportunities. And seven, physical store presence improves online sales. These trends are supported by recent customer research conducted at a cross-section of Macerich centers. The research indicated that lower average expenditures and shorter trip durations were more than offset by increased frequency of visits and higher conversion rates. We firmly believe that stores located in densely populated trade areas will benefit the most and increase in importance to the retailer. Big boxes. Throughout the portfolio, there is strong demand for big box users larger than 10,000 square feet. We have increased our exposure with retailers such as T.J. Maxx, Home Goods, Ulta and Nordstrom Rack. These retailers have opened stores across the portfolio including enclosed centers, open air centers as well as lower productivity centers. In addition, during the fourth quarter, we signed a lease with JCPenney at Inland Center to open in the former Gottschalks building. JCPenney is on track for an opening in the fourth quarter of 2016. We continue to devote additional resources to activate the common areas of our centers. Efforts are orientated towards permanent kiosks and business development opportunities as well as incubation of online retailers into physical stores. Multiple goals for the common area include revenue enhancement, improved presentation and an elevated customer experience. Development, leasing at the development projects remains on track. At Broadway Plaza, we have 87% of the expansion space under executed leases. We are very pleased with the merchandise mix and eager for the majority of the expansion to open during the second quarter of 2016. This will add to our existing anchors of Nordstrom, Macy's and Neiman Marcus. At Green Acres Commons anchored by Dick's Sporting Goods, we have 85% of the space under executed leases and are anticipating a third-quarter opening in 2016. Finally, we have completed the public financing agreements and are moving forward with the development of Fashion Outlets of Philadelphia in partnership with PREIT. This project is anticipated to be completed in late 2018 or early 2019 and will incorporate approximately 775,000 square feet of retail area. With that, I’d like to turn it over to Art.

Thank you, Bobby. Thanks, Tom. That’s a lot to cover, so I'm going to cover just a few other items and then we will open it up to Q&A. As you can see, our operating results were terrific on every level, whether it be margin improvement, occupancy levels, rents that we have in place in the portfolio, re-leasing spreads, all of these are factors that contributed to a very significant same center NOI growth rate in 2015 and gives us optimism into the future as to our growth patterns over the next couple of years. It is hard to predict what is going to happen, obviously, in the retail broader environment. And there are many factors that could influence that up or down. But we recognize that if you think about all of the different levers that we can pull that can create shareholder value, that there probably is no lever more important than having the maximum possible same center NOI growth pattern. Developments, redevelopments, these are also extremely value creation, but they obviously have capital that gets deployed as part of that process. It is a permanent lever that we will be pulling in the redevelopment arena or the new development arena. And we’ve got a very strong track record of positive results from those activities and we anticipate that the projects that are underway right now will continue to drive value for us going forward. Another lever that we didn't anticipate that we were going to be able to pull that gave us the opportunity we feel to create value here was the selective disposition of a non-core asset, Panorama Mall in November of this past year. And the agreement with Macerich and Taubman to purchase Country Club Plaza in Kansas City from Highwood Properties. That closing is anticipated to close March 1st. The gross price is $660 million with a 50% anticipated loan to value that we anticipate will be put on the property. Most all of our equity will be funded through the disposition proceeds that we generated from Panorama. Country Club Plaza is an iconic 15 block 1.3 million square foot mixed-use retail and office property located in the heart of Kansas City. It is well known throughout the industry and we believe that, jointly with Taubman, we will be successful in taking that property up to an even higher level of performance from where it is right now. We are very pleased to have completed the joint ventures that we did. That was a very significant and large capital decision, a capital recycling decision. And to effectively have raised new capital in the private markets through joint ventures, that was used to fund either -- both the special dividend that we paid out as well as to fund the stock buyback program that we have announced. And we are pleased that just a couple of months after announcing the $1.2 billion authorization that we have got over a third -- we've got about -- a third of that has been accomplished and delivered to date. So we’re very happy about that. The status on the new developments, I think we are in very good shape there. If you take a look at Philadelphia, the redevelopment of Broadway Plaza, the addition of the theater at Santa Monica Place, the expansion of Green Acres, the recycling of the Sears building ultimately at Kings Plaza, and Fashion Outlets of San Francisco, we think we are in a very good position for those projects to deliver good shareholder value into the future. But again, I would reiterate that obviously on a risk-adjusted basis we see the opportunity to generate strong same center NOI growth as being one of the most attractive levers that we can pull in creating shareholder value. So with that, operator, I would like to open it up for Q&A.

Thank you. [Operator Instructions] Our first question will come from Craig Schmidt with Bank of America.

Hey. Thanks. In thinking about comping against the tougher same-store NOIs, how much more room do you have in terms of the aggressive operating cost management?

Craig, some of that will flow into 2016. We really set out to do that in the second quarter, so we will probably have a quarter and a half of that which will positively benefit 2016. We really pretty aggressively manage those, we will continue to do that. But I don't think we will see the same kind of cuts in 2016 as we had in 2015. It is hard to duplicate. I think we can maintain what we did, but it is going to be hard to replicate the same amount.

And then -- and when thinking about possibly selling some more of your non-core assets, how many more assets would you like to sell out of the portfolio?

We really don't have a number, per se. It is really opportunistic at this point. We've really taken the portfolio in terms of its composition to where we wanted to get it with well over 95% of our NOI being fortress type of income. So, anything that we do going forward, the way that we think about it is that dispositions will be there as a source of capital for us over the next say three to five years to fund opportunities whether they be development, redevelopment or potentially even an acquisition of something. So there is no specific number, but we clearly do intend to periodically continue to prune the portfolio and to recycle the capital. Funding the purchase of a great center like Country Club Plaza with the disposition of a very mature kind of enclosed community center equity source of capital is really, from my viewpoint, a great trade for the company. And likewise, funding development and redevelopment capital going forward through selling off non-core assets is also, to me, a very sensible thing to do.

Thank you.

And next we have a question from Michael Mueller with JPMorgan.

Hi. I have two quick leasing questions. First, where do you see lease spreads settling in 2016? It looks like you ended 2015 with about a 14% average. And then, Bobby, I think you said that the average duration on leases signed in 2015 was 6.2 years. And just out of curiosity, is that shorter than it has historically been and can you give us a little color on that?

Sure, in terms of the first question, our target is to maintain mid-teen spreads. The nature of the statistics, sometimes it will bump up, sometimes it will bump down. But our goal is for mid-teen spreads. And we believe based on current market conditions we can achieve that. In terms of the average lease term, it's actually increasing. As the portfolio has improved in quality over the last three years, we have seen that number increase to longer durations.

Okay, thanks.

And our next question comes from Ki Bin Kim.

Thank you. Going back to your comments on retailer bankruptcies that might be a little bit more this year than last year. How much of that is actually configured into your guidance? I see that your bad debt expense is kept flat from an assumption standpoint this year versus last year while your lease termination income ticked up $5 million. So I was just curious if you’ve taken some kind of reserve for those expectations?

Well, it's resulted in more conservative revenue assumptions on the lease up. There has been some rent concession conversation that has also been factored into the 2016 guidance. The increase in lease termination revenue is just because we currently are in discussion with a number of tenants so that is a specific number. Generally we assume $10 million to $11 million going into a year as our assumption based on history. And so, we still have that general assumption, but we had a few specific tenants that we have been negotiating with, which is also a byproduct of what Bobby said is typically when you have times when you have store closures it is not always bankruptcies and it can tend to lead to more lease termination revenue.

Okay, and just a follow-up. Bob, I mean we are a couple of months more into it than your last conference call. Anything incremental that you've discovered more on your retailers?

I would say not really. We haven't noticed a significant difference in discussions with tenants. The tenants that we are in discussion is pretty much the same group as we talked about in the third quarter. So, I think the holiday season didn't provide any surprises negatively or positively.

Okay, thank you.

And next we have Alexander Goldfarb with Sandler O'Neil.

Hello. Good morning out there. Just a few questions. First, on the same-store NOI guidance, I think on the second quarter call last year, you guys talked about trying to maintain sort of a 6% number, sort of like what you delivered in ‘15 over the next few years. This year the NOI guidance is below that, but yet the bottom-line FFO number exceeds what the Street was expecting. So, can you just help us walk-through if we should expect same-store NOI to get back to that 6% number? Or maybe there are some non-same-store items that are really driving the FFO beat relative to consensus.

Yes, the two -- well first I will take the NOI question, Alex. There was a comment made in July of ‘15 that you know it was a caveat that it wasn't guidance, but that internally we were hoping to see same center NOI growth as 6% over the next couple years. And you very well -- when you combine 2015 and 2016 it could average to close to 6%. I will say that subsequent to July the leasing environment has been viewed more cautiously as before. In fact, looking at some comments made by my colleague to my right here, Bob Perlmutter, one of his quotes was looking towards the end of the year we are anticipating that bankruptcies are likely to be comparable or higher than in previous years. And he went on at some length, in fact, to the extent that internally he earned himself as a result of that call the nickname of Dark Cloud. So I would say that through the second half of the year we became more cautious as it related to the leasing environment and that certainly affected the 6% growth rate that had been discussed earlier in the year. In terms of the FFO number, a lot of components in there, Alex. Obviously the joint ventures which happened late in the year, all financing activity which came in at extremely attractive rates, all those things affected the FFO number, as well as the buybacks and the accretion from those. We did have a lot of cash on the balance sheet which is dilutive. So there are many factors that went into the ultimate FFO number.

And then the second question is on the development schedule, one, it looks like a few projects got pushed back a year. Maybe it is just as you get more into planning stuff trues up. But also the spend on Philly increased as well as the time line lengthened. So if you could just provide some perspective on that?

Sure. I’ll take Philly and then I will let Bob talk about the timing. On Philly in the shadow report we have been netting out the city assistance. There is roughly $90 million of city assistance which has been to a large degree solidified. And so, we are now showing the gross number for the project and not netting it by the city assistance. Most of that city assistance will come in the form of a TIF. And under GAAP, TIF income is recognized as income, not a reduction of costs. So that’s why that is grossed up. It really hasn't been as a result of a change of the scope of the project.

Yes, Alex, in terms of timing, I don't think it is anything significant other than really working through the pre-development process. Both of these projects are complicated projects. They are mixed use projects and it's taken some time to get it through the pre-development process, get the pre-leasing commitments that we needed and ultimately move them to the under construction pipeline.

Okay and then just finally on Philly then. Tom, if the city assistance is now in the gross number, the yield -- is the yield that we should think about the project returning, is that on the net basis or that’s inclusive of the gross of the city's contribution?

It is a function of the gross cost and the income from the TIF is included in calculating that 8% return.

Okay, thank you.

It really is a function of just following GAAP on that. We weren't sure in the very beginning exactly what the format would be of the various assistance vehicles that we were able to attain. But the one -- and we exceeded our expectations on that side of things. So we are ready to go and it is really just now, as we move it into the in-process pipeline, taking a look at how the GAAP numbers would require us to treat it.

Our next question will come from Todd Thomas with KeyBanc.

Appreciate the comments around eCom and brick-and-mortar. Just given all of those comments around buy online, pickup in-store and the impact returns have on store sales, how are conversations changing with retailers when you negotiate leases? And how are you setting rent with all of those factors in mind?

This is Bob Perlmutter. I think your initial reaction is, well, we want to capture these sales for percentage rent. But that is not really the way we are looking at it. What we are really trying to do is understand the amounts and the impacts of all of the different eCommerce strategies on the brick-and-mortar. Not with the goal of gaining more percentage rent, but with the goal in terms of understanding how important these locations are with the retailers. So, we’re learning, we are teaming up with certain outside professionals, we are using rights we have under our lease. And it is really to understand how the physical store influences the eCommerce. And it is more than just what are their reported sales.

Also just to add to that. Look, we think of ourselves as an omni-channel landlord, an omni-channel owner. And in that context, we see our duty and our opportunity to our retailers to be not only to provide them with the physical space in the mall, but to also support other activities that they have like buy online, deliver from store -- things of that nature. So it’s an evolving business, but the one thing that is clear to us -- and this kind of goes back as a follow on to some of the same center conversations. I’d say that the most important factor that drives your same center NOI growth is the leasing demand and the rents that you can achieve. And our team -- and we are not unusual, but our team is extremely well aware of what these locations are worth to retailers. And there is no science that they should pay X percent of sales per se. We just factor everything in and the mark-to-market that we have been able to put up over the past many years has been with double-digit leasing spreads. And we see the opportunity to continue those kind of spreads as being very clearly in front of us. And the evolution of brick-and-mortar retailers into more omni-channel retailers makes physical stores more valuable to them. They’re valuable not only from the viewpoint of what they sell from the store, but they're also valuable as a service to their customers, for customers to buy online and then bring it back to the store and exchange it for something else. So, they think of all of their activities and, as Bobby was saying, it’s really -- it is not so important, the exact sales number, it is really more having a knowledge of what is important to that particular retailer and then that helps you to drive the rents. And if you have must-have real estate, which is our goal here, then you are able to put up very good numbers.

All right, thank you. Just lastly, apologies if I missed it. But Tom, typically you’ve given the quarterly percent weighting of FFO throughout the year. Do you have that by chance?

We will provide that later, Todd, I don't have that with me at the moment.

And next we have Rich Moore with RBC Capital Markets.

I have a question for Dark Cloud actually. Mr. Cloud, your mall landlord friends this quarter on their calls have specifically said that bankruptcies are going down in 2016 versus 2015. And I am curious, are the tenants that you are concerned about in their properties too or are you seeing unique guys in your properties I guess, in your portfolio that aren't in theirs?

I really can't speak for the other companies. I can tell you that the tenants that we are dealing with obviously have footprints beyond our centers. And again, none of the groups that we’re speaking with would be a surprise to anybody given the press and the public markets pricing of these retailers.

Rich, I really wouldn't -- look we are trying -- people love to have a pulse on where we see the near-term for the business. Look, I hope that Bobby's caution here is not reflected in increased bankruptcies. I hope that we have fewer. But we’re really just trying to give you our all-in view of where we see things. But I would want to reiterate that in putting out the results that we just have attained in 2015 and as we see the opportunities into 2016, we see the demand for our properties to be very strong. So maybe we’re being a little too cautious, time will tell. But we are telling you what’s in our assumption and assumptions are exactly that.

In terms of the tenant bases, they are spread throughout the portfolio. In terms of when the tenant ultimately comes and makes a decision on which stores to keep, the potential is always the lower quality assets will be more effective through store closings.

Okay. And could you maybe go through the tiers and let us know where the occupancy costs are across the portfolio?

I am not sure that we disclose that information in the supplement.

Okay, then as an alternate, can you tell us what sales growth --

I'm sorry, I'm sorry. It's okay, it’s in the supplement. So you’ve got the top 10 assets, the cost of occupancy was 13.4% and those top 10 assets generated 28% of our NOI, but if you go through page 13 and 14

They are relatively stable throughout the --

In the supplement you are going to see that it is pretty much an average of mid-13 occupancy for every grouping.

Okay. And finally, was wondering if you had sales growth productivity excluding Apple and then excluding Tesla.

No, we are not going to disclose that information.

Okay, thank you.

And next we have Christie McElroy with Citi.

Hi, good morning, guys.

Hi, Christy.

Hi. Just following up on your greater caution in 2016 contributing to that more conservative same-store NOI guidance, are you expecting re-leasing spreads could potentially compress or see a potential occupancy decline over the next year? And are you changing anything in terms of capital allocation strategy as a result of that greater caution like might you potentially pull back on development spend?

In terms of answering the last question, clearly over the last three years we’ve tried to manage our portfolio and reduce our exposure to retailers that we felt were weaker. That happens more in the existing portfolio than in terms of new developments, which we obviously target the strongest retailers in the market for. In terms of where it impacts us, our position on many of the bankruptcies has been that as part of a restructuring you are investing in the retailer's business and we only want to invest in the retailers that we think have good long-term viability. And because of that we have probably taken a little bit more stringent stance on not restructuring with certain retailers who have gone through bankruptcy. The net impact for us is a short-term negative in terms of potential loss of occupancy. But we think a long-term positive in terms of being able to replace the stores with stronger retailers at higher rents.

Okay. And then just on Country Club Plaza. Can you talk about the importance of bringing in Taubman as a financial partner, what they bring to the table and why do they have leasing responsibility?

Well, we are doing everything jointly. So from a merchandising viewpoint, Bobby and a couple of his key lieutenants and the person that runs leasing at Taubman, they have been collaborating and putting together a merchandising plan. And it is really going to be I think relationship driven. But as we sit down and we identify which tenants we think that we want to either move out or to move in, whichever team has the better relationship with that tenant will take the lead. But you should think of it as joint right on all major decisions and a whole bunch of operating decisions. We did have to decide who was going to be the manager and Taubman wanted to do the day-to-day management and we were fine with that. Our focus with them is going to be more thinking about the marketing, merchandising and potential expansion opportunities that are available at the property. So why did we do it together? We just both thought that it was a great opportunity and we knew it was going to be a competitive situation in terms of bidding and there were many bidders. We felt that the opportunity to be successful in buying it would be maximized if we joined together to buy it. And so far I think that we both feel very good about this investment opportunity. And it may have been that doing it together is what resulted in the best thinking in terms of coming up with the confidence to pay the price that was required here.

Thank you.

So we feel very good about the thesis and it is playing out, I believe, well. And we think that the Plaza has terrific upside. And I think time will tell, but I think you are going to see some very significant opportunities for us to generate value there.

I'm going to jump in here for a second before the next question. In respect to Todd Thomas' question on the quarterly split of FFO, Todd, that’s 20% in the first quarter, 23% in the second quarter, 26% in the third quarter and 31% in the fourth quarter.

Thanks, Tom.

Our next question will come from Floris van Dijkum with Boenning.

A quick question, I noticed that you guys are – in terms of capital allocation you’ve historically spent most of your money on your A malls. You’ve now got three of your lower tier malls in the – potentially under development; Westside, South Park and Paradise Valley. Can you touch upon your – how you think about allocating capital and what kind of redevelopment plans that might entail?

When we have something specific to – in the way of a plan, we will bring those forward. I think those have been in the supplement in that manner for at least the last couple of quarters if not more. But we have a number of different development plans for each of the ones that you mentioned. And fundamentally we think that they are sitting on very good real estate and that there will be opportunities. But that is why they are in the shadow pipeline, not the in-process pipeline, because we have not identified the exact plan we want to pursue or the numbers that would be associated with that plan. Does that answer your question?

Yes, it does. Can you maybe also touch upon your Sears joint venture and how many of your 10 Sears assets do you expect to start maybe this year? I know that none of those are in the development pipeline yet, but what do you think is feasible before year end and what kind of returns are you expecting?

Well, actually two of them are going to be – have currently already had Sears downsize and turn over about half of each of the two buildings to Primark, one is at Freehold and one is at Danbury. And those both – so Sears has already shrunk and Primark will be opening in the summer. Those were deals that were in process when we first started the conversation with Sears, but those will happen this year yet. And then the others, we are at different points of thinking through the opportunities. These were long-term investments that we made here. And we think that there is long-term that from the protection of the overall value of the properties owning the key pieces of land is tremendously important. But also we think that there are fundamental opportunities to be generated from each of them, some will be bigger, some will be smaller. And as we identify the opportunities we will talk about them. But we are not feeling any rush to say, okay, all 10 of them have been redeveloped or repositioned. We like the optionality that we have of being involved here. We are working together with Seritage to come up with the best plans that we can come up with. And as we come up with those plans then we will go ahead and move forward towards implementing them.

Thanks.

Thank you.

And next we will take a question Tayo Okusanya with Jefferies.

Yeah. Hi, this is George on for Tayo. Just wondering if you could comment on the trends in asking rents in terms of how are they trending on a year-over-year basis. I know you're seeing that leasing spreads have moderated a bit, but just looking at asking rents themselves.

Probably the best measure we can give you is the one I stated earlier that quoted the 15 leases versus the 14 executed leases. I think it was 5.4% increase. The setting of market rents is not – is more of an art than a science. There is many, many factors that go into it whether it’s a new lease or renewal, what’s the use, how big the space, how much frontage, what are the options that the tenant has in the market. So, it is not an exact science. And as we have talked a lot about in the past, we find that the dominant assets in the densely populated trade areas where the retailers have limited options always drive the highest rents.

Okay, thanks. And are you noticing any trends geographically?

As I said earlier, from a leasing standpoint the strongest rates and spreads were on the East Coast and the West Coast.

Okay, thanks. And any update you can provide on Fashion Outlets of San Francisco and the plans there?

No, not yet. We're still working on it. And there is lots of infrastructure work that our partner is in the middle of performing. And as we get more specific in terms of the size and the returns available, we will obviously be more specific at that point in time.

Okay, thanks.

And we have no further questions. We'll turn it back over to Art.

Thank you very much for joining us. As you can see, we feel that we had a terrific year and we see our prospects for the future are very, very good. We are aware of broader economic conditions that could have an influence on those results, but fundamentally we feel very good about where we are. And we look forward to meeting with you further and answering any questions that you may have in the near-term. So thank you very much for joining us.

And that concludes today's conference. We appreciate your participation.