Good day, and welcome to The Macerich Company first quarter 2020 earnings conference call. Today's conference is being recorded and will be kept to one hour. At this time, I would like to turn the conference over to Jean Wood, Vice President of Investor Relations. Please go ahead.
Good morning. Thank you for joining us on our first 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 website at macerich.com.
Joining us today are Thomas 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. I thank all of you for joining us today, and I really hope you and your families are safe and staying healthy. As you read in our earnings release, the first quarter was a good quarter that exceeded expectations with generally good operating metrics. Today, as we battle this horrific COVID-19 pandemic, the first quarter results frankly seem not that relevant. It is a crisis that's impacting our way of life and touching almost every facet of the global economy. We've been fortifying our company and reshaping our strategic plans to withstand this unprecedented event. We are closely monitoring the situation, establishing our reopening strategies and protocols, and working with local and national authorities to ensure our number one priority is the health and safety of our employees, tenants, service providers, and shoppers.
Our employees have done a tremendous job of managing through this crisis with a situation that is changing not only day by day, but even hour by hour. Going back to mid-March, we instituted some liquidity measures, which Scott will elaborate on later. That allowed us to accumulate $735 million of cash on our balance sheet at quarter end. Some of the operational things we have done or are doing include hosting a webinar with PwC and U.S. Bank for our retailers to explain the stimulus package and help them access some of those funds. We've donated food and supplies to support first responders. We've donated our real estate for essential functions, including blood drives, drive-through testing facilities, first responder parking, and drive-through farmers markets. We've made available our billboards and other media for campaigns about staying home, healthy hygiene protocols, and blood drives.
We've designed and implemented a website to provide retailers with a library of information on the stimulus package. State and local governments closed a total of 43 of our 47 centers, except for essential businesses. We started reopening centers last week, with more in process this week and throughout May. Our reopening plans include finalizing guidelines and criteria for reopening our centers in alignment with government requirements. We will implement modified hours, new operational rules, and communication protocols. There will be increased and highly visible cleaning and sanitizing protocols. CDC guidelines will be followed closely. We are addressing path of travel, vertical transportation, and delivery issues. We will accommodate curbside pickup for our retailers. We are assessing PPE equipment requirements, queuing solutions, restroom configuration, common area and food court seating solutions, and restart of tenant construction.
There will be touchless hand sanitizing stations at entrances and exits and throughout the centers. Meanwhile, our retailers are making changes to allow for safe reopening of their stores, including removing or resetting store fixtures, installing hand sanitizers, placing social distancing markers for fitting rooms, installing plexiglass shields at checkout counters, and reducing occupancy generally to 50% of the maximum allowable. We currently have 13 centers reopened in Arizona, Texas, Colorado, Missouri, and Indiana. Most counties have their own approach to how and what will open initially. We expect this to evolve daily and be a phased approach. California has very gradually started its phase reopening of the state late last week, including non-essential retail, including apparel and sporting goods for curbside pickup only. We expect almost all of our centers and most of our tenants to be open by the middle of June.
One of our liquidity measures was to defer most of our redevelopment where possible. We'll finish up Fashion District of Philadelphia and Scottsdale Fashion Square, the luxury wing. Most other redevelopments have been deferred beyond 2020. We anticipate spending about $60 million in the last three quarters of this year, which represents a $90 million reduction from our previous redevelopment pipeline. This reduction excludes the joint venture with HPP, which owns the Project One Westside, Google's new Class A creative office campus. Work continues on that project during the pandemic, which is fully funded by a non-recourse construction loan. This crisis has shown the importance of brick-and-mortar locations as key channels of distribution. Although it has accelerated sales of many digitally native brands, the increased sales cannot make up for the lost profits from physical stores.
E-commerce is an expensive business model due to high delivery costs and customer acquisition costs. Omnichannel business models have become critical to almost all retailers, including most of the digital brands. Even with growing and accelerating e-commerce sales, it cannot make up for lost sales and profits from physical store closures. This crisis has emphasized the importance of brick-and-mortar locations as key sales and profit drivers for most retailers. During the closure, many of our retailers have been fulfilling orders out of their mall-based stores. Upon reopening, we expect buy online, pickup in store to be even stronger than it was pre-COVID-19. Some examples that are currently underway at Tysons Corner, 24 tenants are fulfilling orders averaging over 8,000 packages per day. At Fashion Outlets of Chicago, Coach is the number 1 curbside delivery store in their entire fleet.
At Scottsdale Fashion Square, one of the department stores continues to be one of the top locations for online fulfillment within their chain, and one of the newly opened restaurants at Scottsdale Fashion Square was the number two location for curbside dinner pickup in the nation. At Washington Square, retailers are fulfilling an estimated 28,000 online orders per day out of their stores. Good retail is not going away, especially in A quality centers. In China, as a post-COVID-19 example, by March 22nd, nine weeks after the country shut down, 90% of the malls had reopened, and traffic has since recovered to an average of 85% of the prior year's traffic. Many of their retailers are also big in the U.S., including H&M, Apple, Lululemon, Adidas, Uniqlo, among others, and they have experience in opening after COVID-related closures. Our town centers are a vital part of their communities.
Our portfolio generates $1.1 billion in sales tax revenues, benefiting local and state governments and their communities. Our centers employ approximately 110,000 workers, many of whom were furloughed or laid off. In the United States, pre-COVID-19, one out of every five workers had a retail job. We need to get those people back on the job. The states and communities where we operate benefit from $225 million in property taxes we pay every year. Our retailers are eager and ready to get open for business and to bring their employees back in a safe and well-thought-out manner. That is what will be happening throughout our portfolio over the course of the next four or five weeks. Now I'd like to turn it over to Scott.
Thank you, Tom. The first quarter reflected good financial results. In typical times, we would consider this a solid start to a new fiscal year, and we'd be looking forward to capitalizing on many opportunities during the balance of the year. Of course, nothing is typical about the current climate. I will start by providing a few highlights for the quarter, and I will then provide some details about the environment we are now facing and how we have bolstered our liquidity to withstand the pressures we now face. Funds From Operations for the first quarter was $0.81 per share, which was flat versus the first quarter of 2019, and which is $0.06 higher than corporate monitor consensus of $0.75 per share. Same-center Net Operating Income for the quarter was up 1%. This was a sector high.
This was on the high end of our previously issued and since withdrawn same-center NOI guidance for 2020 of 0.5% to 1%. EBITDA margin increased by 44 basis points to 62.6%. First quarter revenues were generally unaffected by COVID-19, given the mid to late March timing of property closures within our portfolio. In late March, given the many uncertainties associated with COVID-19, we formally withdrew our 2020 earnings guidance. We will provide updated guidance when we gain more clarity into the year and when we are in a position to do so. For April, we collected 26% of our billed rent, including both permanent and temporary revenues. Through last Friday, May 8th, we have collected 18% of our billed May rent, and we estimate that May collections are trending slightly better than April. As our centers continue to reopen, we anticipate improved collections in June and thereafter.
As a reminder, while many of our retailers were compelled to close during this period, the vast majority of our leases do not abate our tenants' obligation to pay rent. As we all continue to navigate these difficult and very unprecedented times, we understand and appreciate the challenges, the many challenges our tenants are facing in light of COVID-19. We will work in partnership with our tenants to collect past due rent. We have taken considerable measures to preserve liquidity. As previously mentioned, the company has drawn the majority of its remaining capacity on its $1.5 billion revolving line of credit. We have reduced our dividend from $3 a share to $2 a share per year. Annually, this preserves approximately $150 million of cash.
For the upcoming dividend, we will pay 80% of that in stock. For each quarter that the board chooses to pay the dividend in stock, an additional $60 million or more of cash will be preserved. Collectively, these two moves preserve $100 million per quarter or more. As Tom mentioned, we have significantly reduced our development pipeline for the balance of the year. The company anticipates spending $60 million in the last three quarters on 2020 redevelopment. Also, as Tom mentioned, that is about a 60% or $90 million reduction versus the previously estimated 2020 redevelopment expenditures for the final three quarters. All told, including One Westside, which again, is independently funded, as well as the first quarter redevelopment cost, which totaled $45 million, we anticipate development expenditures will be approximately $150 million for 2020.
We have reduced variable, controllable shopping center operating expenses by nearly 50% during the period that our assets have been substantially closed, except for essential retail and services. As of March 31st, 2020, the company had $735 million of cash on its balance sheet, including our JV share. Recently, the company exercised its option to extend the maturity of its revolving line of credit to July 6th, 2021. I will turn it over to Doug to discuss the leasing and operating environment.
Thanks, Scott. Leasing momentum began the first quarter where it left off in 2019. It was strong and velocity was on the rise. However, economic conditions caused by COVID-19 and the government-mandated shutdown of our shopping centers put downward pressure on leasing activity as the quarter came to a close. That said, there were several bright spots, including rising sales, strategic lease signings, and many exciting and much-anticipated store openings. Portfolio sales as of February 29th, 2020, were $801 per square foot, and that represented a 7.4% increase from $746 per square foot at the end of Q1 2019. It's noteworthy that we experienced these sales increases from top to bottom, meaning these increases weren't just concentrated in our better centers and driven by one or two tenants.
Economic sales as of February 29th were $939 per square foot, and that's a 7.1% increase over $869 per square foot at the end of Q1 2019. Occupancy at the end of the first quarter was 93.1%. That's down 90 basis points from last quarter and down 1.6% from a year ago. This is primarily due to almost 900,000 square feet, or 4% of our GLA, that was rejected and closed through bankruptcies in 2019 and then into the first quarter of 2020. Temporary occupancy was 6.2%, and that's down 20 basis points from this time last year. Trailing 12-month leasing spreads were 6.5%, up from 4.7% last quarter, but down from 11% in Q1 2019. In addition to affecting occupancy, the 900,000 square feet of our GLA that was rejected and closed through bankruptcy also put downward pressure on leasing spreads on a year-over-year basis.
Average rent for the portfolio was $62.44. That's up 2.8% from $60.74 one year ago. As I mentioned earlier, our leasing momentum carried over from 2019 into the first quarter. Velocity continued. Leasing volumes were strong. During the quarter, 194 leases were signed for 740,000 sq ft, totaling $38 million in total revenue. Deals of note include Free People at La Encantada, Rolex at Scottsdale Fashion Square, Kate Spade at Fashion Outlets of Chicago, and Lush at SanTan Village and Los Cerritos. We also signed four more deals with Lovisa at Chandler, Deptford, Flatiron, and Freehold, bringing our total number of recent deals with this retailer to 13. In the large format category, we signed a new 75,000 sq ft lease with Dick's Sporting Goods at Danbury Fair Mall.
This is an expansion of its existing store that will take over a portion of the space recently vacated by Forever 21. At Eastland Mall, we signed a new lease with SHOE DEPT. ENCORE, and that'll open later this fall. In the food and beverage category, we signed a deal with Jollibee at Green Acres. In the international category, we signed Typo at The Oaks and four more deals with Cotton On at Deptford, Freehold, Vintage Faire, and Tysons Corner. We remain active with the digitally and native and emerging brands, signing new deals with Faherty at Village at Corte Madera and Golden Goose at Scottsdale Fashion Square. Last quarter, we discussed the importance of getting out in front of our 2020 expiring square footage.
To that end, I'm pleased to report, especially in the current environment, that we have fully executed leases on almost 60% of our expiring square footage in 2020. This is up from 38% in Q4 2019. Another 25% of our 2020 expirations are already in lease documentation. At the end of the quarter, our leasing pipeline, which we define by fully executed leases scheduled to open in 2020 and 2021, was approximately 125 retailers, comprised of 860,000 square feet. After speaking to each retailer, at this point in time, only four have indicated they no longer plan to open. This equates to only 8,000 square feet of the 860,000-square-foot pipeline. In the first quarter, we opened 49 new tenants, totaling 311,000 square feet for a total cost of occupancy of $12.8 million.
This compares to 37 new openings totaling 130,000 sq ft for a total cost of occupancy of $9.2 million during the same period last year. Momentum continued at Fashion District Philadelphia with the highly anticipated openings of Sephora and Kate Spade. Other notable openings include ALDI at Green Acres, Life Time at Biltmore Fashion Park, and Round1 at Vintage Faire, all in large format category. In the food and beverage category, we opened Nobu at Scottsdale Fashion Square, the first and only in the state of Arizona. Perfectly situated at the front door of Fashion Square's new luxury wing, Nobu opened at the end of January and was immediately booked well into March. Also opening in the F&B category were Breakfast Club at Biltmore, Pedals & Pints at The Oaks, and Shake Shack at SanTan Village.
The digital emerging brands continue to expand their omni-channel presence portfolio, and the first quarter was no exception. We opened Casper and Fabletics at Scottsdale Fashion Square, Morphe at Arrowhead, and TravisMathew at Broadway Plaza. Turning from metrics and statistics for a moment. Over the last 30 to 45 days, I have spoken to many, many retailers, and there are several consistent themes out there. It is all about liquidity, and cash is king. Retailers have never operated with all stores closed. Typically, there are just three days during the year when stores are closed: Christmas, Easter, and Thanksgiving. Retailers want to open as soon as it's safe to do so. Inventory levels are high, and reopenings will be very promotional in order to move this inventory. Obviously, there will be some great incentives for shoppers to return to our malls. Stores will look and feel different as retailers begin to open.
Common themes are reduced hours, limited occupancy, strategic placement of inventory on the floor to create space, fitting rooms being cleaned after each use, and contactless payment to eliminate the physical touch. Curbside pickup, especially in the beginning, will be a seamless option. It'll be phone to trunk. Buy online, pick up in the store will become even more popular. Bottom line is, retailers want to get their store open. The big lesson learned, and all the retailers are saying it, is that online business will never replace the importance of the physical store. As I reflect on the current retail leasing environment, I can't help but think how critically important our strategy of pruning our portfolio over the last several years really was.
Having a best-in-class, pure-play A portfolio has proven over time to be extremely beneficial as retailers continue to reduce their fleets and focus on quality real estate. As we look ahead, the power of our portfolio becomes even more important. Will there be short-term disruption? Of course, there will be. Has leasing velocity slowed post-COVID-19? Yes, it has. In the long run, I'm confident that the town centers we have worked so hard to develop will continue to be extremely well-positioned. Brick-and-mortar stores aren't going away, and that's just a fact. If nothing else, the pandemic has confirmed this. Yes, physical retail will continue to shrink and will do so in an accelerated manner given the current crisis.
As you know, we generally own must-have real estate, and we have an extremely talented set of professionals that will continue to differentiate our company and our centers even during these incredibly uncertain times. Now I'll turn it over to the operator to open up the call for Q&A.
Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for a moment to allow everyone an opportunity to use the signal for questions. We ask you that you limit yourself to one question and one follow-up question. We will take our first question, which comes from Samir Khanal of Evercore. Please go ahead. Your line is now open.
Hi there, everybody. Doug, you've talked about the 60% of expiration that you addressed. You're currently sort of in lease documentation for the other sort of 25% here. Can you give us an idea of sort of the tenant negotiations you're having? What are tenants asking for today that they weren't asking for maybe six months ago? Are they leaning towards more percentage rents? Are there more short-term deals? Just any color would be helpful.
Well, Samir, first of all, the 60% of our committed square footage, those are fully executed leases. Short of a bankruptcy or otherwise, we don't expect to renegotiate those at all. Future dealings are being negotiated. I think what I would say is the retailers are much more cautious. They're much more conservative. That's being reflected in some of the clauses they're putting in. To your point, especially with expirations, we are looking at shorter-term deals than we have in the past.
Okay. Thanks for that. I guess my second question as a follow-up is, maybe for Scott here, can you provide any color around conversations with sort of mortgage lenders at this point, given those sort of lower rent collection levels we've seen? I guess, what's your ability to defer interest payments at this time if needed?
Good morning, Samir. Hope you're well. We continue to have conversations with lenders. Really the effort there is to defer the payments so that the outflows match the inflows, which are going to be stronger later in the year. Those conversations continue today.
Okay. Thank you.
You bet.
We will take our next question, which comes from Craig Schmidt of Bank of America. Please go ahead. Your line is open.
Thank you. Of the 74% of rents not collected in April, how many of those tenants are currently negotiating with you with deferrals?
Craig, as you can imagine, we're having literally hundreds of discussions with our retailers that are underway. Many of them are asking for rent deferral. These are individual discussions, and we're not going to get into specific details on a tenant-by-tenant basis here. It's a long process. There's still a fair amount of uncertainty as a lot of these tenants don't know when exactly they're going to be able to reopen. Those discussions are underway and, as Scott said in his comments, we've collected about 26% or 27% of the April rent. May's trending a little bit better. We do have 13 centers open, some of the uncertainty's been removed for at least some of the tenants. I would expect those conversations to go on and stretch out into June.
Great, how many of your malls have a significant curbside service available now or as they would open?
Doug, you want to take that one?
I'm sorry, I couldn't hear the question, Craig.
Sorry. I was wondering how many of your malls have a significant curbside service available, either now or when they open.
A lot of the ones that are open can only open with curbside. Actually, this is a trend that started even before COVID. Really what started out as an amenity has become a must-have. While it's still in its early stages, I think there's a future there. I think it's really important because really, if you think about it gives our platform just another mode of distribution for these retailers, and that can only increase the value of our real estate. Again, it's early times.
Okay. Thanks for the comment.
We will take our next question, which comes from James Sullivan of BTIG. Please go ahead. Your line is now open.
Thank you. The first question I had is, the apartment tower at Tysons was under contract at year-end. In the 10-Q for the first quarter, it doesn't appear to be, and it doesn't appear to have been sold. Can you just give us an update on what the story is there?
Jim, we've been in discussions with our partner to sell to them, and that was pre-COVID. Once the entire market got volatile, say mid-March, they decided to hold off. Additionally, we like the asset, we like the diversity, the net operating income. We're just fine hanging on to that 50% interest in the tower.
It's very possible, Jim, that we finance that asset within the next few months.
Okay. I wonder if you can give us an update, Tom, on Nordstrom's decisions. I think three of your assets are on the list. Nordstrom deals were famously known to be expensive to make for a mall owner. Are they going to be expensive to break for Nordstrom?
Jim, you're right. It's really impacted most of the A quality operators in the sector. In our case, of the 16 they announced, three were with us, Flatiron, Chandler and Freehold. Those are all stores that are owned by Nordstrom. They're good centers. It remains to be seen what's going to happen with those boxes. They no longer had an operating covenant, Jim, That's why they chose some of those centers on that list.
And so the-
They-
Sorry.
They control the space. I'm sorry, go ahead, Jim.
They control the space. They don't have to offer it to you first.
No, although that's typically what happens, as you know.
Okay. Very good. Thank you.
One second. We will now take our next question. It comes from Christy McElroy of Citi. Please go ahead. Or Christy McElroy of Citi. Please go ahead.
Hi. Thank you. Just to follow up on Samir's question on the debt payment deferrals, are these just deferrals or are you working on any full loan modifications as well? Have you also had discussions with your lenders to change your line of credit covenant calculations or thresholds in this environment?
Hey, Christy. Good morning. Those are just discussions about deferrals. There is no modification other than just a deferral till later in the year. As it relates to the line of credit, we have a lot of headroom within our existing covenants, and we are not focused on modifying our covenants whatsoever.
It's Michael Bilerman. Good morning out there. Just as a follow-up, I was wondering, Tom, if you could sort of elaborate a little bit on sort of the dividend strategy on a go-forward basis. I think if you look across the REIT sector right now, the predominance of the companies in the more affected sectors, like in retail, lodging, and healthcare, I think outside of yourself and one other, have just basically suspended or reduced their cash dividend rather than paying it in stock. I wanted to know how you think about progression from here in terms of, one, the split between stock and cash, the level now that the IRS allows you to go to 90%, and then whether you've already satisfied at this point your full commitment, and therefore, not pay a remaining dividend for the rest of the year, given just the taxable income needs.
Hi, Michael. How are you? That's a good question. Relatively complicated question. I'll take it a piece at a time. To correct, we assessed the size of the dividend, the last time we declared a dividend, and we cut the dividend from $3 a share to $2. We also, given we were in the beginning throes of the pandemic, we decided to preserve liquidity by using what was then allowed 80% of the dividend to be paid as stock. In terms of that going forward, that's going to be a quarter by quarter decision of the board. In terms of whether we would suspend or cut further, it remains to be seen at this point, what kind of impact the closures will have on taxable income. At this point, under most of the leases, even though the malls were closed, the tenants owe us rent.
Again, the taxable income is based on accrual accounting, not cash accounting. At this point, it's a little too early to determine what adverse effect COVID-19 will have on our taxable income, but that will be certainly something we'll assess a little bit later in the year. That being said, when we made our original cut, we expected to have $2 a share of taxable income or so, maybe a little bit less. That may be able to go down a little bit, but it's certainly not going to go to zero. We will continue to have a dividend, in my opinion, throughout the balance of the year, the size and composition to be determined as we know more.
We will now take our next question from Michael Mueller of JPMorgan. Please go ahead. You're live.
Yeah. Hi. Can you give a little more color on the reopen so far? Maybe talk about the % of stores that have been open and how traffic and sales have been building.
Yeah. It progresses day by day, Mike, and I think in the case of our mall in Texas, South Plains, it opened at about 25% of the tenants were open, and it's kind of evolved to closer to 50%, and traffic picks up by day. It's really going to be center by center, region by region, how that happens. In California, there was a very gradual start to reopening that happened last Friday, and that's just curbside pickup. Other locations, like in Texas, almost everything was able to open. Obviously there are some limitations. I think in many cases, to allow for social distancing, they're limiting the number of people in a given store to 50% of the maximum capacity. And there's also protocols in place and procedures to make sure there's not a lot of people aggregating in common areas.
A lot of the food court seating has been removed in a lot of the centers. There's a number of changes, but each county is different, and each county has different rules and regulations. So far, general feeling is that there's been pent-up demand and the retailers are eager to get open. The only restraint on them is really when they feel they can do it safely and they've got all the precautions and protocols in place to do it safely.
What have you heard about sales traction?
Very gradual. Starting relatively light traffic and picking up every day. We're only a couple of weeks into it, so it's still pretty early to draw any conclusions.
Thank you.
Thanks, Mike.
We will now move on to our next question from Alexander Goldfarb of Piper Sandler. Please go ahead. You are live.
Oh, hey. Good morning out there. Just two questions. First, just going back to Christy's question on the debt refinancing. I think last time you also spoke about putting, I think maybe with Stonewood or one of your top centers as unencumbered to encumber that and then use those proceeds to pay off Niagara. You also have Danbury maturing this year as well. Can you just update us? You mentioned the Tysons apartment tower that you plan to put some debt there, but can you just outline your other thoughts for Danbury, Niagara, and if you're considering putting a mortgage on Stonewood?
Sure, Alex. Good morning. Excuse me. Obviously, the credit markets are a bit locked up, and our centers are either shut down or they're just coming out of this period. Leading into this period, we had started on the refinance pipeline, and we were moving along on what were going to be some very attractive deals. When the credit markets return, I'm confident that we'll be able to finance those assets. In the meantime, though, we're going to extend the maturities that are rolling in 2020 and early part of 2021. That's our position right now. Yeah, like I mentioned, the apartment tower is a little bit of a different animal, so I'd expect that within the next several months, we'll be able to put some financing on that project.
Okay. Then on the Nordstrom closings or any of the other department stores that you've had closed, do any of those trigger any co-tenancy with any of the inline shops? Just curious.
Very immaterial impact, Alex. Very immaterial.
Okay. Thank you.
You bet.
We will take our next question, which comes from Shivani Sood of Deutsche Bank. Please go ahead. Your line is now-
Hey, thanks for taking the question. In the 10-Q, there was a note that Macerich reduced shopping center expenses by 45% while the properties are closed. I'm just curious, of that other 55%, how much is contractually reimbursable by the tenants versus payable by your team?
Yeah. Most of our leases are fixed CAM in nature, so every dollar falls to the bottom line. Generally speaking, probably 85%-90% of that falls to the bottom line. For the months of April and May, while our centers were substantially closed, we made considerable progress in terms of reducing our operating expenses, basically the variable expenses. As our centers ramp up, we'll still see some savings until we get to a more fulsome occupancy level and larger consumer traffic. We'll still see some savings beyond the closure periods.
Thanks for that color. In terms of the shadow pipeline, I appreciate it's very early, but you guys have always shared great transparency there in terms of how you're envisioning the centers. I'm just curious what element of flexibility you have to reallocate GLA away from some of those more experiential concepts as the project progress in two to three years. For example, if there isn't demand for a Dave & Buster's or what have you on the other side of this pandemic.
Yeah, most of the redoing of the Sears boxes, particularly the more complicated ones such as Washington Square and Los Cerritos, are fairly early, and those are two projects where we've got to go through the entitlement process. We still have a fair bit of flexibility to repurpose the square footage. In fact, that's generally the plan at both of those centers, where a significant amount of the retail will be something else. There is a lot of flexibility, and we do have the ability to pivot away from experiential into something else if that's what's warranted and that's where the demand is.
Thanks for your time.
Thank you.
We will move on to our next question from Todd Thomas of KeyBanc Capital Markets. Please go ahead. Your line is now open.
Hi. Thanks. Good morning out there. First question: as your centers reopen, can you talk about the ability of your tenants to pay rent as they reopen their stores and how those discussions have been, I guess primarily for maybe restaurants and theaters and maybe some of the fitness users if they're operating at reduced levels going forward. How are you approaching those discussions?
As I mentioned, Todd, in my earlier remarks, we're having literally hundreds of discussions with our retailers. They're all somewhat unique based on the location of the center and the type of use. Obviously, there's a couple categories that you hit on that are going to be pretty challenged. Restaurants being one, where they're not going to be able to have as many tables. They've got to accommodate social distancing. That's going to put margin pressure on there. We're working through each and every deal with our restaurant tenants as well as our theater operators are going to face a challenge with social distancing as well. That certainly was the case in China when they tried to reopen. We fully expect to have conversations with those two uses. Those will be unique to the operation and the location.
In terms of the gyms, most of the fitness operators that we've talked to have a pretty good plan for social distancing, and they're eager to get open, and their members are very eager to get back in the gym and start working out. I'd say there's a significant amount of pent-up demand. I wouldn't expect any changes there, and they seem well on their way to having procedures and protocols in place, whether they be removing a certain amount of the equipment or limiting the number of people that can come in at any given time, with a heightened level of cleaning and sanitizing. I'd say that probably the two toughest categories are going to be the theaters and the restaurants.
Okay, then just a follow-up on Alex's question regarding co-tenancy. Was that response specific to the Nordstrom closures that you mentioned, or was that a broader comment about co-tenancy exposure across the entire portfolio in terms of how many leases have co-tenancy clauses today and how much economic exposure there might be just across the portfolio more generally?
Yeah, Todd, that's a broader comment about the co-tenancy exposure we see as a whole across the portfolio, not just Nordstrom specific.
Thank you.
You bet.
We will now move on to our next question, which comes from Richard Hill of Morgan Stanley. Please go ahead. Your line is now on.
Hey, good morning, guys. I want to maybe go back to some of the questions that were asked about the mortgage debt. I guess I'm a little bit surprised that you haven't had discussions with maybe some of the CMBS lenders. I think about Green Acres Mall, a pretty high-quality mall. I think it matures in February of 2021. I'm curious, is it because you haven't reached out to the CMBS lenders yet, or are they preoccupied? It's all reasonable if it's preoccupied because you guys are focused on your business and CMBS lenders are dealing with their own issues right now. I would think that something like Green Acres Mall would be a likely modification candidate. Maybe if you can just help us walk through that a little bit more, that would be helpful.
Sure, Rich. I don't want to get into too many specifics. We are in active discussions with the lenders regarding the extensions. I would agree with your assessment that leading into this period, there was very adequate debt service coverage on all these loans. In fact, on balance, I would consider that group of loans to be very under-leveraged, that group of assets. I think we'll be successful in achieving extensions to gain some additional term, give us flexibility to get to a better credit climate. This is the playbook that we used 10 years ago coming out of the GFC. We extended loans, got to a better horizon. In some cases, we sold assets. In some cases, we refinanced assets and repaid loans. It's a playbook we're familiar with.
Understood. Going back to the comment about the covenants on the line of credit. I recognize that you said that you're not focused on them, and I'm sorry if I'm putting words in your mouth, but I think it's because they have a fair amount of cushion. Is that cushion primarily because of accrual accounting versus cash accounting? Could you maybe just walk us through why you feel so comfortable with the covenants at this point?
The covenants are accrual-based accounting. Correct. We feel like there's plenty of room. There's going to be, on a case-by-case basis, concessions that we have to make. I do believe those will be isolated, and there is plenty of room to absorb any of that impact.
Got it. Well, I think that's all I have. I hope all of you and your family are safe and well. Thank you for taking my calls.
Thank you very much, Rich.
We will take our next question from Greg McGinniss of Scotiabank. Please go ahead, your line-
Hi. Yes. I just think about the accounting treatment leases, given the jump in the amortization of above and below market leases. Curious what drove that increase, and then how should we be thinking about the impact that COVID-19 related disruption may have on straight-line rents and amortization to market leases?
Yeah, sure, Greg. Hey, this is Scott. Good morning. There were a couple leases in particular that impacted the above below market revenue. Those were lease modifications during the first quarter that resulted in a write-off of those non-cash revenues, which is the spike that you're seeing in our supplemental disclosures. That's the first point. The second point regarding straight line and the impact. Of course, we'll be assessing in much greater detail, the level of collectibility for all of our retailers. To the extent there is a collectibility issue, I think everybody now is probably more educated on lease accounting than they ever were, and there's a potential for some impact to straight-line receivables, as well as to the timing of rent recognition if we end up reserving some of those. We will deal with some of that.
We certainly aren't providing guidance at this point, though. That will impact every real estate company.
Okay. Just to clarify there, were the lease modifications due to anything COVID-19 related or separate?
No, they were not.
Okay. Following up on Shivani's question, what does the variable operating expense savings actually work out to on a dollar basis? Maybe said differently, what % of operating expenses are considered fixed versus variable?
It's about $8 million a month. It's not inconsequential by any means. Most of our expenses, frankly, are fixed in nature when you consider you've got debt service first and foremost, but you've got property taxes in the mix. You've got insurance, which is certainly not a cheap line item. A very significant portion are fixed and non-adjustable.
All right. Thank you.
You're welcome.
We will take our next question from Brian Haworth of RBC Capital Markets. Please go ahead.
Hi, good morning, guys. In the 10-Q you mentioned that you do not expect the pandemic to trigger co-tenancy. Are the majority of your tenants on the same page with you as long as the closures are temporary? Is there a point where co-tenancy could be triggered? I know you mentioned permanent closures could do it, but is there some earlier point before that that could do it as well?
Yeah, I think when we're commenting, I think what you're referring to in the 10-Q is a risk factor. Those are usually drafted by the attorneys, so they throw everything in there but the kitchen sink. In our case, we specifically know we're going to deal with some co-tenancy, but it's a relatively immaterial amount as it relates to Nordstrom closures. As it relates to the temporary closures, generally speaking, we do not think we have a significant amount of co-tenancy concern. Again, we don't know how long these closures are going to last. We think we should have everything up and running by mid-June, but we'll know more in 30 days. We know more day by day, and within 30 days we're going to know quite a bit more. At this point, we don't think it's going to be material.
Well, I guess it's in the outlook. Yeah, I guess my question is really trying to get more of a sense of what are the tenants' expectations. Is it just we'll wait 30 days, and then we'll talk about it again, or we can kind of rediscuss it?
Just to punctuate, we expect co-tenancy to have a very immaterial impact. That's what we see. That's the Nordstrom stores that were already discussed, and that's any other large anchor stores that we believe are at risk right now. We believe the impact is immaterial. In terms of the temporary impact from the closures of COVID, our view is there is none.
Okay, thank you.
We'll take our next question from Ki Bin Kim of SunTrust. Please go ahead, your line.
Thanks. Hi, out there. Just going back to the co-tenancy, I appreciate your comments regarding that it's immaterial or little impact. I think what the market is trying to do or what investors are trying to understand is trying to bracket the downside. Instead of talking about the kind of near-term exposure, can you just talk about that in totality? What % of your tenants actually have a co-tenancy clause, whether or not that might be triggered near term?
The co-tenancy is given by exception, it's not the rule. In any given center, you might have five to 10 tenants that have a co-tenancy provision, and it's usually a multitude of things. It's not just one anchor that's named. It's typically tied to multiple anchors. At this point, again, we don't think it's going to be material. Macy's announced closure of 125 stores. We had one on that list that they were planning on converting to office space anyway. At this point, other than the three Nordstroms, we're not aware of any. Even with that being said, co-tenancy provisions are the very rare exception rather than the rule as it comes to our portfolio.
Okay. Just going back to the debt covenant topic, I appreciate that you have significant cushion as of now. That also kind of relies on a couple of things, right? I'm more particularly interested in the total liabilities versus GAV calculation or secured debt to GAV calculation. I believe those calculations are based on a 6% cap rate. I'm just curious about the risk there is from lenders to adjust those cap rates to reflect a different world. Practically speaking, if you do violate these covenants, I realize lenders are trying to work with all the borrowers at this point, but what is the consequence of violating these covenants from a practical standpoint?
Well, we're nowhere near any of the covenants. The lenders can't arbitrarily change that cap rate. It's part of the loan agreement. It's an arbitrary number. It's part of the calculation. It's not based on a market cap rate in any given month or quarter. They can't arbitrarily change that. We've got plenty of room on our leverage covenant.
Okay. All right. Thank you.
We will take our next question, which comes from Haendel St. Juste of Mizuho. Please go ahead.
Hey, good morning out there.
Haendel, good morning.
Early in your commentary, you mentioned fortifying and reshaping your strategic plan to adjust for life post-COVID-19. I understand the piece of the comments on the dividend earlier, more of a quarter-by-quarter consideration, the sizable reduction in the development pipeline and some of the tenant initiatives you outlined. I'm curious, what else is on the table? Some of your peers have taken some more painful steps of furloughing staff, cutting senior management, as well as board cuts. I'm curious, what else is on the table here from a capital preservation, cost efficiency, overhead cost savings perspective? Thanks.
Haendel, we took a look at the bigger line items. Two largest line items for us, two of the top three or four are interest expense as well as property taxes. Scott mentioned we're working with some of our lenders to defer some of the mortgage payments. That's a big number. We don't have a lot of employees. We outsource the major headcount areas of security and maintenance and house cleaning. A lot of those are variable costs that Scott mentioned that we're able to reduce. Some of the other mall owners do that in-house, and that increases the headcount pretty significantly. We went after the big line items in terms of laying people off. Our hope going into this was that this would be a short-term closure, and we could get our centers up and open and operating. We chose not to do that.
It wouldn't have been a significant amount of savings, so we didn't do that. We put in place a hiring freeze, and you may recall a couple years ago, we did a very significant reduction in force, reduced our headcount by about 15%. That's still relatively current, and we didn't see a lot of room there, to do there.
Got it. Okay. Thanks for that. Maybe adding some color to the tenor of the conversations that you're having with tenants who haven't paid, and maybe some broader timeline of expectations for resolution here, when we should know more by. Certainly something that's going to take, is it a few months? Is it a few quarters? Maybe as part of that, some commentary on how much exposure to percentage rent leases you're comfortable with in a post-COVID world, and maybe, where overall occupancy might settle out. I mean, should we be expecting low 90s and maybe even high 80s occupancy in a post-COVID world as well? Thanks.
Doug, why don't you take the first part of that?
The conversations, the first part of that was the conversations with the retailers, and I've had a lot of them. We started out with the real focal point was the retailers doing everything they could to maintain a sales force and a management force at the property level. That was extremely important to them because, when it came time to open, they did not want to have to go out and hire and train. They did everything they could to maintain those employees. Candidly, that could have come at the expense of rental payments. In fact, I'm pretty sure that it has. Fast-forward now, all the retailers are doing right now is focused on opening their stores as soon as it's safe to do so.
There's a built-up, pent-up demand out there in the shopping community, and there's also, as I mentioned in my opening remarks, a lot of excess inventory. I think we're going to see a lot of promotions upon opening, and we are getting calls almost daily by retailers who want additional space. They may want to put a second store in one of our centers to sell inventory, or they may want to put a store in a center that they're not in just to move inventory. That's going to be a big part of their reopening plan. Tom?
Yep. Then in terms of the second part of your question, you asked about occupancy. It's really too early to tell. I'm sure there's going to be some tenants that, as a result of COVID, end up going bankrupt. We haven't seen a lot of that yet. We've seen a few, obviously. That's going to affect occupancy. We're not giving guidance at this point because there are just too many uncertainties, and that would include on the ultimate occupancy level as well.
Sure. That's fair. I understand that. Any comment on comfort level with percentage rent leases? Will those become more prevalent in the portfolios? Thanks.
I'm sure in those hundreds of conversations our leasing personnel and asset management are having with tenants, there's some of that discussion going on, but again, it's too early to tell how much of that we're actually going to agree to, if any.
Perfect. Thank you.
Thank you. Well, thank you, everyone, for joining us today. We look forward to speaking with many of you virtually at the NAREIT coming up next month. Stay well, everybody. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now