Good day, and welcome to the Macerich Company Second Quarter 2020 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.

Good morning, and thank you for joining us on our second quarter 2020 earnings call. During the course of this call, we will be making certain statements that may be deemed forward-looking within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995, including statements regarding projections, plans or future expectations. Actual results may differ materially due to a variety of risks and uncertainties set forth in today's press release and our SEC filings, including the adverse impact of the novel coronavirus COVID-19 on the U.S. regional and global economies and the financial condition and results of operations of the company and its tenants. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included in the earnings release and supplemental filed on Form 8-K with the SEC, which are posted in the Investor section of the Company's Web site at macerich.com. Joining us today are Tom O'Hern, Chief Executive Officer; Scott Kingsmore, Senior Executive Vice President and Chief Financial Officer; and Doug Healey, Senior Executive Vice President, Leasing. With that, I would like to turn the call over to Tom.

Thank you, Jean. Thank you all for joining us today and I really hope all of you and your families are safe and staying healthy. As we read in our earnings released this morning, the second quarter was a very unique and challenging quarter as we continued to battle this horrific COVID-19. By early April, all of our town centers were closed by government mandate. Our results were obviously adversely impacted in the quarter due to most of the centers being closed for two-thirds of the quarter. Our number one priority during the quarter was to safely reopen our centers and get our tenants open and get their employees rehired and safely back to work and to welcome back our shoppers. I am really appreciative of the entire Macerich team that did a tremendous job getting our centers reopen safely. By July 10th, all but two of our assets both in New York City had reopened. Business was gradually returning and for our centers open for at least eight weeks, sales were returning to near pre-COVID levels. Shoppers were back and most of our tenants have reopened. On July 13th due to a spike in COVID infections in California, the governor mandated a second partial closure of the state, specifically closing churches, business centers, indoor dining, bars and enclosed malls. We have 13 malls in California, nine of which are enclosed. Tenants in those malls, however, they have a direct entrance from the outside can remain open, which includes 38 of the 45 anchor stores in those centers. At this time, there's not a specific timetable for reopening the California centers. We do expect our two New York City centers to open within a month. Some of the significant measures we've undertaken to improve the safety of all of our…

Thank you, Tom. Given the government mandated property closures in our portfolio resulting from COVID-19, which on average have lasted 71 days through today, the second quarter reflected a substantial decline in financial results versus the second quarter of 2019. Funds from operations for the second quarter was $0.39 per share, which was significantly down versus the second quarter of 2019 at $0.88 per share. Same center net operating income for the quarter was down 23% and year-to-date same center NOI is down 11%. Changes between the second quarter of 2020 versus the second quarter of 2019 were driven primarily by the following. These figures are at the company's share. One, increased quarter over quarter bad debt expense of $37 million. Bad debt expense in total of the company's share was $40 million in the second quarter. This represents a 14% reserve on second quarter leasing revenue and 24% reserve on second quarter uncollected lease revenue. Elevated bad debt expense alone caused a 17.5% percent decline in same center net operating income in the second quarter. Secondly, minimum rents and tenant recovery income declined by $6 million. Three, the combination of specialty leasing revenue, percentage rents and business development, declined by $8 million. These are line items that are very susceptible to decline when the assets are closed. Four, other income and loss declined by $17 million, driven by a decline in parking garage income at several of our urban locations, a decline in food and bev revenue at Tyson's hotel and due to certain adjustments to investment assets between the second quarters of 2020 and 2019. Non-cash revenue declined by $9 million, including $4 million from straight line of rent as we assessed our receivables and by $5 million and SFAS 141 revenue. Shopping center expenses were favorable by…

Thanks, Scott. Normally, I'd begin my remarks by elaborating on the statistic and the metrics that Tom and Scott touched on. But given the state of our business, I think it's more appropriate to focus on what leasing has been doing during the last four and half months in order to navigate through these unprecedented times. First and foremost, as our malls began to open, it was primary goal to ensure that our retail partners opened as soon and as safety as possible. As I mentioned last quarter, retailers are used to being closed only a few days a year, not three months a year. So getting retailers open, trading and paying rent was and continues to be our top priority as our malls open sort of the vast majority of our retailers. In fact, the 40 retail properties we have open, on average 90% of the GLA that was opened pre-COVID is now open today. This was accomplished by almost daily communication with all of our tenants, including the nationals, regionals and the locals. Conversations included the readiness of our properties at opening, how we could assist in staffing, what we could do supplement individual store marketing. And in the case of certain uses, like restaurants and fitness, how we could assist in reorienting their operation in order to comply with the new regulation as a result of COVID-19. Second with the issue of rent, many of our retailers, especially the nationals had the ability to open quickly and began paying rent yearly. Others could open but found the ability to pay rent difficult since they had not been trading for months. This of course was exacerbated by those retailers who do not have an adequate omnichannel platform. So we worked with many of our retail partners to come…

Thank you [Operator Instructions]. And we'll take our first question today from Craig Schmidt with Bank of America.

I was wondering what's your expectation for inventory levels in holiday ‘20 comparison to holiday ‘19, given some of the disruptions for those ordering inventory?

Craig, I think the retailers are going to work off most of the inventory, the excess inventory that they had built up during the closure. And I would expect them actually to be running a little bit leaner at year-end than they were a year ago in terms of the amount of inventory. So probably less promotional from holiday season and therefore better margins.

And then after you get to two New York City assets open and the nine enclosed California malls, should that provide a lift to your rent collection and your same store NOI?

Yes, there's no question, Craig. We've seen that as the tenants get open and we're able to resolve how we handle rent during their closure the cash flow starts coming in. So I would expect to see accelerating collections when we open those 11 centers. But I expect third quarter accelerate from what we saw even in July. So far August collections have come in at a stronger pace than July did.

Next we'll hear from Jim Sullivan with BTIG.

First question that I have is for Doug. Doug, you went through the status of the leasing payments situation, in terms of deals made, deals under negotiation, tenants who have filed or otherwise [you’ve abated] [ph]. And then the final category was tenants that you’ve apparently reached kind of a roadblock and looks like you might be heading toward legal action. But I wonder if you could just repeat what percentage of the leases or revenues would fall into that last category?

I don't have that at my fingertips. Scott, do you have that?

Yes, Jim. I would say roughly 5% to 10% fall into that category. It's certainly the exception not the rule.

And follow-up question for me. And Doug, when you were talking about it being a good time, obviously, for tenants who are looking to expand their store base I know that in the past, I think Macerich has done multi unit deals with Amazon, albeit for their retail format. And I wonder if you could just comment about the appetite for Amazon to get in the press obviously, about interest in anchor boxes. Any comment or insight you could provide would be appreciated?

Jim, I'm not going to comment on anything related to Amazon. I've discussed on prior calls stores that we've opened but short of that, I would leave that to Amazon to speak to.

We’ll now hear from Christy McElroy with Citi.

Just, Scott, following up on your comments in regard to the inability to sort of finance those mortgages maturing near-term. Are these currently with CMBS or life insurance companies that you're having these extension negotiations with? And would these just be sort of straightforward extensions, or would they include any sort of rate set? And I'm imagining that you could -- just more broadly, imagining you've explored all options here in terms of refinancing. Is it just a matter of price or are you just finding there's just no demand to run that kind of money long-term?

It's a combination of both CMBS as well as life company. I expect there’s short-term extensions without getting into too much detail, because we're in negotiation on each one of these. I would expect them to be very straightforward. I don't expect significant changes in economics whatsoever. As I mentioned in my prepared remarks, even taking into account the impact of the pandemic, these loans have helped underwriting metrics. These all were part of the plan as we came into the year to raise a pretty significant amount of excess capital. Certainly, that environment has changed a little bit as a result of COVID, but the underwriting metrics are healthy. Really it's just a function of, similar to the GFC, although, that was more widespread across multiple real estate sectors. But just the capital markets are not as receptive to our product right now. So that's really what the function is. It's not -- we're not trying to shop for a better price and wait, it’s really just trying to get to better credit climate. And I do think we'll be successful. Again, these are healthy loans. If you look at the malls that we're talking about, they're between 600 and 650 bucks a foot, so healthy product.

On average, currently leveraged less than 40%, I would say today.

And then just your revolver, obviously, fully drawn coming up next year. Are you already looking at sort of recast options? How are you thinking about that?

Yes, we're in the middle of it right now. It's obviously a big point of focus for us. The new maturity is July 2021. We've been in frequent contact with our banks throughout this pandemic period, keeping them up to date on the operating portfolio and where we stand. So we're right in the middle of it right now.

I mean, it's fair to say you feel pretty good about it, or you could have some of the same concerns that you have on your mortgages?

No, I feel good about it.

Samir Khanal with Evercore has our next question.

So Scott, you mentioned the 24% for the reserve versus uncollected rent. Can you maybe break that down for us? Sort of what are you -- what's included in that bucket? Not to get tenant specific but at least categories. So any color would be helpful as we think about incremental reserves over the next few quarters?

I'd say half of the reserve is -- half of our allowance is bankruptcy related. Significantly elevated bankruptcy environment, so that's a good portion of the reserve. And I'd say the balance is primarily focused on some of our local tenancies. The tenants that are less financially healed than some of the nationals, you look at those two categories that's the majority of the allowance.

And restaurants, restaurant are in that category as well.

I guess as a follow up to that, what is your exposure to sort of local tenants in the malls today?

Our local tenants make up about 8% to 10%.

And as you think about sort of segment with the burn off of the PPP loan, is that fair to say that that's going to be another segment to worry about for the second half here?

Well, no. I think the fact that they're open and doing business and have cash flow, they're much better positioned than they were in the second quarter. I would expect to see far less in the way of bad debt reserves in the third and fourth quarter.

Next question will come from Mike Mueller with JPMorgan.

Yes, that was partially my question, I was trying to get a sense as to how much bad debt could improve in Q3 and Q4 based on what you've already seen for the improvement in July and August collections. I'm not sure if you can add any color to what you just mentioned?

Historically, we've run between $5 million and $10 million a year. So for us to have $40 million in one quarter is pretty extraordinary and I think I’ve seen that in the last 35 years. I would expect we would return to close to a normal level with, you could see us having as much as $5 million per quarter in the third and fourth.

You mean in addition to the normal level. Okay. Got it. And then…

No, just as getting closer to the normal level.

And then, Scott, what was the straight line write off in the quarter?

Yes, straight line was down about $4 million and that was really predominantly write offs associated with our assessments of receivables.

Next we’ll hear from Floris van Dijkum with Compass Point.

Maybe I'd love to get your thoughts as you're dealing with the potential of revolver maturity and some of these other loans and clearly, the lending markets are less forgiving right now or less open to retail. As you think about some of your capital needs going forward and I know you have some cash in the balance sheet. When do you think is the right time potentially to raise equity? And how do you think about that going forward? What are the things that need to happen?

Well, I can say, now certainly isn't the right time to raise equity, trading at $8. We've got increased cash flow, available cash flow as a result of reducing the dividend and we’ll gradually be able to work the leverage level down. The capital markets will be back. We've been through other downturns, such as the great financial crisis and the debt markets shut for a period of time and then they reopened and they were never an issue. We've got great relationships with our line banks. We recast this line of credit 7 times with the same lead banks. And as Scott said, we've been in communication with them and there's -- they’re very positive and supportive. So we're not worried about the line at all and we believe we get extensions on the near-term maturities. There's time until the debt markets return.

And then maybe one other question for me. Just want to get your thoughts on, as you look at the mall evolving overtime. What are your thoughts on grocery at the mall? And do you see room for enhanced grocery offerings at your properties?

Absolutely. We think it's a great use. We have been, in many cases, we've had interest by the grocers but we haven't had the space. And so given the fact that we will get a few boxes back, I think we're going to get one JC Penney back and one Macy's back, which is going to give us an opportunity to do more of that and we think it's a great use.

And is there much repurpose or reconfiguring of the box, are you going to carry those boxes down?

It depends on the situation. Some cases the grocers like to be freestanding, so we would just knock the box down and repurpose the building somewhere else. In some cases, some of the smaller grocers can go in an existing box and they don't have to have a prototype. So it's a little bit of both.

We’ll now hear from Alexander Goldfarb with Piper Sandler.

Just wanted to follow-up on previous questions. So with regards to the bank line of credit, Scott, that you discussed that you guys are in discussions with. Are you thinking that that will stay unsecured, or are you thinking for the banks saying that that would probably go secured?

Alex, terms are still under negotiation. I don't think it's appropriate to comment on that right now.

And then with regards to, just in general and looking at the debt, you said that you're working with, I think on the five loans that you're refinancing and then maybe your debt overall. The five loans that are mixed of life and CMBS. Can you just give at least a little bit of color as far as -- understand obviously, you guys have longtime been with the life, so they know you but our understanding is the CMSB is just a much tougher animal to deal with, not because of the people per se but just because of the structure and everything that goes on to the securitization. So can you give maybe a little bit of nuance and how the discussions are going? As I say, clearly, the life guys know you, but CMBS seems to be the harder one. So just sort of curious what you can share with us on these five loans and then the other loans that are coming up over the next year or two that maybe on the CMBS side?

We're no foreigner to the CMBS world and we've been transacting in CMBS for as long as it's been around. When it comes to relationships, we not only pride ourselves on our bank and life insurance company relationships but also on deep servicing relationships. Now granted the dynamics behind the scenes are a little bit different, we're having frequent communication with each one of our CMBS servicers similar to what our balance sheet lenders are about what's going on at the [offsets], keeping them well updated, well informed. We do have a voice on the other end. So while it's more difficult to get things down, it's certainly not impossible. And I do think we will be successful in getting these extensions done. And the markets not gone forever, Alex, we've been here before. We've demonstrated our ability to extend loans for short-term period until the capital markets come back. In fact, when we did it post GFC recall that was on a much, much lesser quality type of product back then you're talking about assets that were doing about 300 bucks a foot that we've since to disposed of. So we've been to this party before, I think we will be successful getting this done today.

Alex, as an example. Scott mentioned that we got low forbearance on 19 loans. In a number of those loans where CMBS and frankly the CMBS lenders were very cooperative, they understood the situation we're all in and they were actually fairly efficient to work with.

So basically, it felt like you have to go immediately, put it into special servicing to get discussions underway with the CMBS guys. You can have sort of an active dialog without taking that step at that. That sounds like a fair way to understand it, Tom, is that correct?

That's correct.

Next we'll hear from Caitlin Burrows with Goldman Sachs.

I think earlier you mentioned what portion of anchors in the California and New York City properties are legalizing curbside pickup. I was wondering if you could talk about whether any inline retailers are using this option too. And if so, like how many or how prevalent it is?

From what we can tell and from what we've heard and especially in conversations with the retailers, curbside pickup has been much more effective for anchors for tenants in power centers think about Best Buy, think about Target. The inline tenants not so much. It’s a staffing issue for them and especially when they have a store open and they have curbside pickup. So that was an issue. But all in all, it really hasn't worked out for the inline mall shop guys. Much more effective for the anchors and the large format tenants.

And then separately, I would assume that the July improvements that you guys saw in collections was impacted by more stores being open. So I was just wondering for the California centers that has unfortunately reclosed. Are those collections seem to be going in the other direction, or have you not actually seen that play out?

We haven’t that play out, Caitlin. The California closures happened June 13th so most of those tenants had already paid their July rent. But August, as I said, was trending ahead of where we were in July. So, so far that's been the case. And again, collections accelerated once we came to terms with the retailers on what to do about April and May. There's an open dialog. Doug is in hundreds if thousands of conversations with tenants and his team and adding myself as well. But I would expect there will be some discussions from the California locations if they remain close much longer.

Next we’ll hear from Derek Johnston with Deutsche Bank.

Continuing on the nine recently shutdown malls in California. Have you guys been given any guidance as to when you can potentially reopen and/or any viral metrics being monitored or tracked with reopening breakpoints like new cases or hospitalizations, so you can get somewhat of a glimpse?

It's something that we continue to push the governor's office for. We had a conversation with them late last week, and we're going through our protocols, we're going through our very elaborate air filtration systems that have been improved to almost hospital quality. We've engaged the head of infectious disease at UCLA to advise us. And so far we have not been able to get a specific set of metrics that the state is looking at. Most of the metrics in the state have been improving, fewer hospitalizations and slowing infection rate. The positivity percentage is down to about 5.7%, they like to see it below five. So things are moving in the right direction. But do we have a definitive hurdle that we know about? We don't. We'd love to know that but we haven't been able to get anything like that from the state.

And look, our checks do point to an increase post COVID for online fulfillments at mall inline stores. And we do here see brick and mortar as a key pillar to leading omnichannel strategies. So the question is, how do you view online sales in stores? And are these online purchases being captured in reported sales. Or in this landscape where retail reach perhaps move away from percentage rents if online activity isn't being accurately captured?

I think sales are going to be less of a black and white metric than they’ve historically been because of that. It's all the negotiation on whether you can get the retailer to include the sell that’s fulfilled out of these mall to be included in the sales number. And certainly that's a fair way to do it. It's something we would push for. But again, I think not only our sales going to be, store based sales per foot going to be less black and white going forward but occupancy cost as a percentage of sales is going to be less relevant than it's historically been, because of this -- look, we want the retailers to be successful. We're just going to have to figure out how to structure our leases so that we capture the appropriate economics.

The next question will come from Todd Thomas with KeyBanc Capital Markets.

Doug, you touched on the 87% renewal rate with regard to the 2020 lease expirations and also, the minimal fallout from the in place pipeline that you’ve seen. Do you have a sense on retention around the 2021 lease expirations as you're having those conversations? And also, can you comment on how rents are trending as the leasing pipeline built out now over the next several quarters for both renewal leases and also retenanting spreads?

Todd, normally this time of year, I have a pretty definitive answer on where we think we're going to be in 2021. But to be honest, for the last four months there really hasn't been a lot of leasing conversations, where normally there would have been and we would have been well into '21. All the conversations as Tom has alluded to earlier have been about getting tenants open and getting them paying rent. And in some cases, structuring deals so that they can begin paying rent. What we have seen is while they were quiet or closed now that they're opening and trading and in most cases, trading better than they expected to be trading, the conversations have begun for 2021.

Outside of closures related to bankruptcies, we do expect your retention at this point to be any, there would be like a meaningful difference relative to sort of historical years?

No. And I don't want to give any guidance either. But the question was always with the tenants on our watchlist. And now the majority of them are off the watchlist and the bankruptcy. So if you take those tenants out of the equation, the ones we're left with, for the most part are productive and we look to be renewing the vast majority of them, albeit probably in the third and fourth quarter of this year.

And then a follow-up to I think Caitlin’s question around curbside pickup and some of the comments there. Can you talk about Fillogic, I believe that's being rolled out at one center today, I think Deptford Mall but there's certainly a lot of chatter and various headlines around ways to capitalize on available space today. So I was wondering if you could talk about that space requirement at Deptford and the economic contribution to metrics? And then are you working to roll out more Fillogic units, I guess broadly across the portfolio?

So the first one you mentioned that we're doing with them, so it’s got a test phase for us to see how it goes. It'll evolve from there. But it's not just Fillogic, there's a number of other fulfillment enterprises, including UPS is looking to getting into the business. And I think that's going to be a way to make it more efficient for the inline retailers to use curbside pickup. Doug mentioned it was pretty effective for the anchors and the inlines as we’re staffed for it. So we think if we can bring in a fulfillment provider that it could be very effective and very helpful for in line tenants. So, it's in the early days of that but I could see that evolving fairly quickly over the next six to nine months.

Did that space, did they begin operations as expected, I think early in July? And can you talk about how much space that they're utilizing?

Todd, they are open and they are operating. It's a small space. It's an inline space. They did not take a big box. They're essentially acting as the go between the store and packaging up the product for delivery and shipment. So they did not have a huge space requirement. Again, as Tom mentioned, it's a pilot and their space requirements may change as their prototypes evolve. But right now, it's not a very significant contributor and they aren't taking a lot of space.

Greg McGinniss with Scotiabank has our next question.

So just to clarify on the watchlist, so you've mentioned that you've got 32 bankruptcies this year, which were on the watchlist. So I'm curious kind of what the ADR percentage exposure is there on the expected loss? Obviously, there's a lot of rewards in there from not just liquidation. And then where did that leaves the watchlist today, and how has it actually evolved regarding newly stressed tenants because of the pandemic?

Doug, why don't we tag team on this one perhaps. Just in terms of stats, roughly 6% of our ADRs has filed. I would say the outcome is somewhat consistent with what we've spoken to in the past. We expect roughly a third of that to reject and the balance will either be assumed as is or assumed with some rental modifications. So it's going to be a combination. But about a third is what we should expect to reject and kind of bracket maybe 2% occupancy loss from bankruptcy fallout. As far as the watchlist, I mean quite literally we've got a primary watchlist and the secondary watchlist. Quite literally, a vast portion of that has flowed through. And discounting that, I would say it's a relatively skinny rest at this point. We're certainly keeping an eye on the outcomes with all these retailers. But I don't at all see the instance of bankruptcies going forward that we've seen this year. They flush through the system. They filed. They’ve oftentimes come with a pre packaged solution with financing in place and we expected the occupancy loss will not be that significant.

And then just kind of moving on to kind of foot traffic or tenant sales and assets. We appreciate the disclosure on the return of tenant sales from malls that have been open I guess over the last eight weeks. Maybe just wondering what the impact has been to more tourism focused centers and whether or not you’re experiencing issues like Fifth Avenue has been in the news lately with certain retailers attempting exit leases, because of lower productivity and food traffic?

Doug, you want to comment on that?

Yes. For sure in the tourist centers, tourist regions, luxury suffered. But interestingly enough, what we're hearing out there is the decrease in tourism spend, especially when it comes to luxury is being mitigated by local spend on luxury. Why that is? I'm not really sure. But I'm sure a lot of it has to do with stores being closed for a period of time. And while there are not tourists, the locals want to go out and treat themselves and that's been something we've been hearing a lot of lately. We've seen it at Santa Monica place and we've clearly seen it at Scottsdale Fashion Square.

And now we are at the top of the hour, I'll turn the call back over to Tom O'Hern.

Thank you, James. Thank you for joining us today. We hope that you all remain safe and healthy. And look forward to speaking with you later in the summer as we move through this challenging time. Thank you.

That will conclude today's conference. Thank you for your participation. You may now disconnect.