Good day, and welcome to the Macerich Company Second Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jean Wood, Vice President of Investor Relations. Please go ahead.
Thank you, Amy. Welcome everyone to the Q2 2019 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. Actual results may differ materially due to a variety of risks, uncertainties and other factors. We refer you to today's press release and our SEC filings for a detailed discussion of forward looking statements.
Reconciliations of non GAAP financial measures to the most directly comparable GAAP measures are included in the earnings release and supplemental filed on Form 8 ks with the SEC, which are posted in the Investors section of the company's website at macerich.com. Joining us today are Tom O'Hern, Chief Executive Officer Scott Kingsmore, Executive Vice President and Chief Financial Officer and Doug Healy, Executive Vice President, Leasing. With that, I would like to turn the call over to Tom.
Thank you, Gene, and thank all of you for joining us today. It was a good quarter with solid operating metrics. Sales per foot were up 12% to $7.76 per square foot. That's our 13th consecutive quarter of sales growth. On an NOI weighted basis, sales were up 11% to almost $900 per foot.
Occupancy was strong at 94%. Average rents were up 4%. We had a very good leasing volume quarter. Looking at the year to date numbers, we're up almost 30% compared to last year. It is a good and improving leasing environment far better than the headlines would lead you to believe.
FFO per share was $0.88 exceeding consensus in our guidance. Last week, we declared a dividend of $0.75 per share to shareholders of record on August 19th and payable September 6th. We've had a few questions about our plan for the dividend given the current high dividend yield. I would like to make it very clear we have no intention of cutting our dividend. Today, we're fortunate to have an unprecedented number of new retailers and non traditional uses for space in our town centers.
That includes co working where we have recent or in process deals with industrious WeWork in spaces. There is significant demand from these names and others for locations in A quality town centers. Industrious who recently opened at Scottsdale Fashion Square enjoyed their best opening occupancy level in their history, proof that co working can thrive in a mall setting. We have growing demand from fitness and health uses, particularly the high end operators such as Equinox and Lifetime both of which we've done recent deals with. Digitally native brands continue to be active.
The brands as they refer to themselves as continue to migrate to A quality mall space. The generation of Peloton, UNTUCKit, Bonobos and Warby Parker have a greater demand today than ever for brick and mortar. The new generation of digital brands such as Morphe, Casper and Indochino continue to increase their mall presence and have significant open to buys for brick and mortar. Entertainment uses continue to expand. Demand for quality space comes from tenants like Round 1, Pinstripes, The Void, Rec Room as well as increasing demand for presence in our centers by theater operators including Harkins, AMC and Alamo Drafthouse.
Hotels continue to seek space on the perimeter of our centers. That's evidenced by the recent signing of a deal with Caesars Republic at Scottsdale Fashion Square. And in fact, last week, we approved 3 hotel ground lease deals, a Marriott, a Hotel Indigo and a Hyatt. Our redevelopment pipeline is progressing very well, including our prospects for the replacement of the Sears stores that we have been able to recapture. We now have control of 10 Sears locations, 7 of which are in our fifty-fifty joint venture with Seritage and that includes Los Cerritos, Washington Square, Vintage Fair, Chandler, Arrowhead, Deptford and South Plains Mall.
Plus we have 2 locations in our wholly owned. Details of our Sears redevelopment plans are more fully described on Page 32 of our supplement. We have characterized these Sears redevelopments into 2 major categories. The first category is retail redevelopment and that represents the adaptive reuse of the existing Sears boxes with primarily retail uses. We estimate redevelopment costs of $80,000,000 to $95,000,000 for these projects with yields ranging from 8% to 9%.
The second category is mixed use densification, which will result in the demolition of the Sears box and redistribution of that GLA with new construction across the Sears parcel with a variety of different nontraditional mall uses. We estimate the cost for those projects to be between $100,000,000 120,000,000 dollars with yields ranging between 8.5% 10%. This grouping includes Washington Square and Los Cerritos, both projects that are currently going through the entitlement process. Those are both great assets and rank in our top 10. Washington Square will feature a streetscape entertainment district with a theater, large format entertainment, dining, select retail, a hotel and potentially co working.
Los Cerritos will feature multifamily, a ground leased hotel, dining and retail elements all interconnected by a town square. The pre leasing for the Sears pipeline projects is very strong. We will continue to announce anchors and significant tenants for these projects over the coming quarters. The array of uses will provide a very diverse cash flow and will significantly exceed the productivity and traffic generation from the former Sears boxes. Looking at the balance of our redevelopment pipeline, at Scottsdale Fashion Square, Apple and Industrious are thriving in the form of Barney's Box.
That's generated tremendous amount of retail interest in customer energy. The newly renovated and re tenanted luxury wing continues to add exciting new brands as the year progresses. By the end of the Q1 2020, our diverse roster of high end restaurants will be fully opened and we anticipate Equinox and Caesars Republic to open in the first half of twenty twenty one. As a result of Scottsdale's multifaceted redevelopment, we continue to see extremely strong sales growth and customer traffic. Comp sales were up 21% and foot traffic is up 7% all year to date.
Leasing demand continues to surpass our initial expectations. The redevelopment has thus far resulted in signed deals for 36 new or renovated stores that includes 21 new tenants and 15 remodeled or relocated stores. New tenants to the property are digitally native brands such as UNTUCKit, Peloton, Indochino, Casper, Tommy John, Ring and Morphe an array of luxury retailers such as Cartier, Gucci, St. John, Jimmy Choo, IWC and Saint Laurent. We also have a flagship Lululemon and Wonder Spaces.
At the Fashion District of Philadelphia, tenant construction is progressing within the four level retail and entertainment hubs standing over 800,000 square feet in the heart of Philadelphia. The project will provide the city with its most concentrated critical mass of retail, taking advantage of mass transit that feeds directly into the concourse level in the of the project and the billions in commercial investment that has already occurred and is planned for future development in the city center. We have signed commitments with Tenet for 90% of the leasable space including Century 21, Burlington, H and M, Nike, Forever 21, AMC, Round 1, City Winery and Wonder Spaces. The project will open in phases with the holiday occupancy expected to be approximately 70% and stabilized occupancy anticipated in 2020 late 2020. At the Los Angeles Premium Outlets site, the Carson Reclamation Authority continues its horizontal site work to support the project.
Our fifty-fifty joint venture with Simon Property Group expects to commence vertical construction of Phase 1 in early 2020 with a planned opening in 2021. As I have mentioned before, we remain firm in our belief that in the long run our high quality assets primarily situated in dense urban markets will thrive as the retail landscape continues to evolve. This belief is supported by recently completed or in process projects like Kings Plaza and Scottsdale Fashion Square. At these properties, we continue to benefit from the retailer demand across the entire property as a result of our redevelopment investments. We will undoubtedly realize similar benefits at many of our Sears projects and this is especially pronounced that those projects were adding densification and a sense of place to the Sears parcel.
We view these as great opportunities and we will continue to deploy capital in a prudent manner to capitalize on these opportunities. And with that, I'll turn it over to Scott to discuss the results for the quarter.
Thank you, Tom. The second quarter reflected good financial results exceeding expectations. Here are some highlights for the quarter. FFO was $0.88 per share, which was $0.02 ahead of both our guidance and consensus estimates of $0.86 per share. This compared favorably to FFO for the Q2 of 2018, which was $0.83 per share.
The primary elements of the $0.05 improvement during the Q2 were the one time activism costs incurred in the Q2 of 2018 totaling $0.13 offset by $0.04 of dilution from greater leasing expenses recognized in the Q2 of 2019 due to the new lease accounting standard as well as $0.03 of dilution from increased interest expense given a higher interest rate environment in the Q2 of 2019 relative to the Q2 of 2018. Year to date, FFO exceeds consensus by $0.03 per share. Same center net operating income growth was up 0.9% for the quarter and is up 1.3% to date, which does exceed our 0.5% to 1% same center NOI guidance for 2019. Margins continue to show significant improvement. The EBITDA margin for the quarter improved by 118 basis points to 65.25 percent.
Year to date, EBITDA margins were up nearly 130 basis points through June 30 versus the 1st 6 months of 2018. This is a function of the entire team's relentless focus to produce efficiencies both from an operating perspective and at a corporate level. With respect to 2019 earnings guidance, at this time, we are reaffirming our guidance for both FFO per share diluted and for same center net operating income, and we direct you to the company's Form 8 ks supplemental financial information for more details of the company's guidance assumptions. Regarding our financing activity, the following summarizes the current status of our 2,008 plans. In June, we closed a $220,000,000 10 year fixed rate financing on San Tan Village in Gilbert, Arizona at a fixed rate of 4.3%.
The transaction produced $85,000,000 of incremental proceeds at Macerich's share. Also in June, we closed a $256,000,000 5 year fixed rate financing on Chandler Fashion Center in Chandler, Arizona at a fixed rate of 4.1% yielding $28,000,000 of incremental proceeds at Macerich's share. Our joint venture in One Westside is negotiating terms on a bank construction loan, which is expected to have very attractive economics and terms and is expected to finance the partnership's remaining incremental cost to deliver the redevelopment of this creative office campus to Google. Our joint ventures in both the residential tower at Tysons Corner known as Tysons Vita and the new office tower, known as Tysons Tower, are negotiating terms for a 10 year fixed rate loans on both of these assets, both of which are currently unencumbered. Fixed interest rates on these 2 separate deals are expected at very attractive levels in the mid-three percent range and combined incremental proceeds of the company's share should exceed $140,000,000 and both loans are expected to close near the end of the Q3.
We
are currently in market to source financing opportunities on the recently redeveloped Kings Plaza in Brooklyn. With consumer traffic trending up and sales up 7% year to date to $7.37 per square foot, Kings Plaza is reaping the benefits of our recent redevelopment investments and we do anticipate a very positive market reception for financing this property. We expect the deal to close within the Q4. Collectively, these financings represent a 9 asset financing plan for 2019, which is progressing quite well and that when complete, we expect to exceed $2,000,000,000 in volume and to generate over $600,000,000 on liquidity to the company. Looking forward, over the next several years, we do incremental financing proceeds of $250,000,000 to $400,000,000 per year.
Today, we have over $700,000,000 of capacity on our revolving line of credit, which is $1,500,000,000 in total and expandable up to 2,000,000,000 dollars This is more than enough liquidity to fund our ongoing development and redevelopment pipeline. Now I will turn it over to Doug to discuss the leasing operating environment. Thanks, Scott. In the 2nd quarter, sales and occupancy remained strong and
the leasing momentum continued. Portfolio sales ended the 2nd quarter at $7.76 per square foot, which represented a 12.1% increase from $6.92 per square foot on a year over year basis. Economic sales per square foot, which are weighted based on NOI, were $8.96 per square foot and that's up 11.3% from $805 per square foot a year ago. Quarter end occupancy was 94.1 percent, that's down 0.2% from the end of the Q2 2018 and down 0.6% from the end of the Q1 2019. Trailing 12 month leasing spreads were 9.4% compared to 11.1% at December 31, 2018.
Average rent for the portfolio was $61.17 and that's up 4% from $58.84 1 year ago. Consistent with the 1st quarter, leasing volumes remained extremely strong in the 2nd quarter. During the Q2, 208 leases were signed for a total of 729,000 square feet, bringing the year to date total to 1,600,000 square feet. This represents 42% more leases and 29% more square feet than at this point last year. The large format space remains active.
We signed an 85,000 square foot lease with Lifetime Fitness at The Oaks. We signed ALDI in 22,000 square feet at Greenacres Commons, Round 1 Bowling in 66,000 Square Feet at Freehold Raceway Mall and Industrious in 31,000 Square Feet at Country Club Plaza. And so this is our 3rd deal with Industrious. They're currently open at Scottsdale Fashion Square and under construction at Broadway Plaza. We remain bullish on co working concept and believe the number and the demographic of their member base is extremely complementary and accretive to our town centers.
We also signed multiple deals with digital emerging brands, including Warby Parker at Corte Madera, Jay McLaughlin at Biltmore and Indochino at Broadway Plaza and Scottsdale Fashion Square. In the food and beverage category, we signed leases with Shake Shack at Santan and Green Acres, Hook and Reel at Green Acres and Goddess and the Baker at Northbridge. We also signed a nice 6 store package with A and F's emerging brand Abercrombie Kids, where we captured 6 of their 15, 2019 open to buys. Lastly, in terms of executing leases, it was another great quarter for the Fashion of Philadelphia. We signed 14 leases totaling 63,000 Square Feet, including Aeropostale, American Eagle, Eddie Bauer, Express, GameStop, Pandora and Wonder Spaces.
We opened 64 new tenants in the 2nd quarter, totaling 154,000 square feet. In the experiential category, in addition to Crayola at Chandler and Wonder Spaces at Scottsdale, both of whom opened in the Q2, we are very pleased to welcome the Kayton Children's Museum to Santa Monica Place. It opened in 20,000 square feet on June 30 to enormous fanfare as it's the only one of its kind in all of Los Angeles. The Caton Children's Museum is a state of the art museum that has several interactive exhibits, which are continuously refreshed and changed out. It also has party facilities, childcare, camps and many other amenities that will make it an integral part of our community.
We love the customer it brings to Santa Monica Place and have already seen the positive impact it's had on traffic and food sales. The museum anticipates in excess of 300,000 visitors a year. Turning to the leasing environment. Despite what the media might report, the leasing environment remains dynamic. A great indication of this is that year to date our bankruptcy closings have totaled 2% of our total occupancy.
However, as I've already stated, our total occupancy is only down 0.2% from Q2 2018. Now without a strong leasing environment, there's no doubt we would have seen greater occupancy loss as a result of these bankruptcy closings. And never has the breadth of uses and categories been so great. As our malls and shopping centers continue to morph into town centers, they're becoming everything for everybody. And this is because our shopper is changing.
The next generation wants it all and they want it all in one place. Therefore, we no longer focus only on traditional retailers. Now it's all about uses and categories. It's about large format uses like Dick's Sporting Goods and TJ Maxx and Target. It's about restaurants like Cheesecake Factory, Shake Shack and Food Kitchen.
It's about fitness like Lifetime, Equinox and 24 Hour. It's about theaters and entertainment like Harkins, Cinemark, Dave and Buster's, Round 1 and Rec Room. It's about experiential like Candidtopia, Crayola and Wonder Spaces. And it's about digital like Casper, Morphe and Madison Reed. And it's about co working like Industrious, WeWork and Spaces.
But this is by way of example only. This list goes on. But these are all categories and uses that are active and we're working with each and every one of them. My point is, as we continue to weed out the under performing and irrelevant retailers, we no longer have to rely on backfilling with traditional retail only. The market won't tolerate it and candidly our shopper wants more.
Our ability to recapture space, especially in our best in class centers is going to be critical as we look to accommodate all of these uses in all of these categories. So, whoever is looking at our industry should be looking at it through this lens. This is an exciting transformation that will result in world class town centers that will soon be adding to everybody. So in conclusion, our leasing metrics including sales occupancy and spreads remain solid. Leasing volumes are strong.
We continue to lease space to new exciting and cutting edge retailers. Categories and uses continue to expand and we continue to merchandise our properties with offerings that are among the best in the industry. And with that, we'll turn it over to the operator to open up the call for Q and A. Thank
And we'll take our first question from Jim Sullivan with BTIG.
Thank you. Tom and Doug, I guess, for this first question, the temporary tenancy number rose back in the Q1. You detailed that in the call. And I wonder if you could just update us on what percentage of the occupancy is temporary as of the end of the second quarter and how you expect that number to change in the coming quarters?
Hey, Jim, this is Scott. Good morning. Yes, the current temp occupancy remains elevated relative to historical expectations. We're at 6.5% temp occupied today. I would expect that perhaps to tick up another 10, 20 basis points or so until the end of the year as we continue to backfill the bankruptcy closures that we saw from the first half of the year.
But just to point out and I think I've emphasized this in multiple meetings, we do view that as a great opportunity going forward to convert short term uses into longer term higher rent paying tenants at full market rents. We should see significantly elevated rents. And I think that will be an important and critical operating cash flow tailwind for us over the next couple of years. But in summation, I do expect it to tick up just a bit more for the balance of the year, Jim.
I just have one follow-up and your last comment kind of provides a good segue for that. Again, in the last quarter, it was indicated that same property NOI growth for 2020, and no firm numbers were provided. However, I think the comment was that the expectation at the end of the Q1 in this respect is that same property NOI growth should return to more historic levels, which had been 3% plus in 2020. And we're 90 days on here. I'm just curious if management is still confident in that assessment.
I'd say that's true, Jim. As we go through the balance of the issue, we have some tough comps on the same center basis in the 3rd Q4. But as we are moving through the backfilling the bankruptcies, were most of the way through there. We think we're going to pick up some momentum as we finish up the year.
Good. Thank you.
With Evercore ISI, we'll hear from Samir Khanal.
Hi, good morning. As we think about the leasing environment and you guys have had a very good job from a volume standpoint. But as we think about your watch list and sort of your tenant restructurings going on, I mean, I guess how much more is left there that we would say would be sort of bad news or concern here? Everybody talks about 100 basis points of credit loss reserve that's been used. I mean, as you kind of think through the next 2 to 3 years, is that kind of the new normal or does that come down you think?
Yes, Sameer, this is Scott. Good morning. We if I look at our opening commentary when we issued guidance, we did have roughly 100 basis points of cushion in our numbers. As I look forward for the balance of the year, we do feel like we've got adequate reserves embedded within our guidance for the balance of the year just to point that out. And that's for every tenant that's in front of us, large and small and otherwise.
We do see our watch list at a much significantly reduced level from where we were a few years ago. So it's hard to say, but as we stand here today, given the perspective we have, it does seem like it's going to be a lessening environment, which versus what it's been historically. Again, none of these bankruptcies are a surprise to us. The brands that have failed or brands that had too much debt on their balance sheet or were long underperformers within our portfolio. So none of this has been a surprise, but we do see the list shrinking.
But I think the fundamental point is we do see 2019 not being negatively impacted from what we see today relative to our guidance.
Okay. And I guess just as a follow-up, when can you walk us I guess, Scott, can you walk us through your NOI guidance? I mean, you're tracking ahead of schedule. You kept the guidance the same. It implies a deceleration in the second half.
You've talked about a strong leasing environment. And I'm just trying to see how much of it is you just being conservative versus sort of real concerns kind of from a tenant fallout perspective in the second half?
Sure, Sameer. Naturally, with the heavy volume of bankruptcies, we've seen over 400,000 square feet close within the first half of the year. And so those closures are naturally going to have a drag on the second half. And so we do have that Year to date, we've seen elevated bad debts. You guys recognize that we did increase our bad debt assumption within our guidance.
We've seen elevated bad debts of roughly $1,000,000 per quarter as a result of write offs of pre petition rents from rejected leases of bankrupt tenants. In addition, we've seen a loss of rental income from those bankrupt tenants and we expect that to continue during the second half of the year. If I were to look at the impact of bankruptcy as a whole on 2019, both between bad debt as well as reduced rental income, I'd frame the impact of roughly 175 basis points to 200 basis points of impact on same center NOI for 2019. So that's really our perspective. Bankruptcies have had a heavy impact.
Will give you an idea of what the sense of the impact is in terms of order of magnitude. And we do expect that we'll have an impact on the second half.
Okay. Thanks very much.
And our next question comes from Todd Thomas with KeyBanc Capital Markets.
Hi, thanks. Good morning. Just following up on Samir's question. How much Sears rent did you collect in the quarter that needs to come out of the 3Q run rate? And were there other tenants that moved out that you collected rent from in the Q2 that would have an impact going forward?
Yes, sure. I don't have that number quantified. Sears, we did collect roughly 1.5 months of rents that will be going away. That does not impact center. Recall that we were clear that we did pull the Sears impact out of same center just as we will pull the redevelopment returns once we do restore the income that will be pulled out of same center.
For the most part, most of the bankruptcy closures were done by the end of the Q1. There were some that spilled into April. But I think for the most part, we've seen the impact as of the end of Q1. There's a little bit trickling in. I don't see a huge impact though from either one of those.
And also bear in mind from Sears, you've got the offsetting impact of placing the development or the costs in the development, which you've got the non cash benefit of capitalized interest. Put all that into the mix, I don't think it's a material impact.
Okay, right. And then, Scott and maybe, Tom, you can chime in here as well. But you outlined the refinancing plans in detail, which was helpful. But can you comment on the potential to raise capital at some point, maybe later this year from the sale of 1 or more assets either outright or in a joint venture format. Just any current thoughts on that process which you've sort of talked about previously?
Yes, Todd. We are currently active in discussions regarding several joint venture transactions that would generate a significant amount of capital. And we continue to negotiate those. And at this point, nothing more specific to report, but we will keep you posted as we move forward with those.
Okay. In terms of timing, is this something that might take place in 2019? Or do you think that this ends up being a 2020 transaction?
Well, ideally, these are multiple negotiations on multiple properties. And given that this would probably generate a significant amount of capital gain, we ideally would like to close part of these transactions in late 2019 and the balance carrying over the beginning of 2020.
Okay.
Thank you.
From Barclays, we'll hear from Linda Sides.
Hi. In terms of the impact of closures on same store for 2019, you said it was 175 to 200 bps. For context, could you remind us what the impact was in 2018 and also 2017, which was a bigger year in terms of closures?
Yes, Linda. 2017, we had total square footage of 970,000 square feet, so almost twice of what it was today. And then, it abated a little bit in 2018 for the year excluding the department stores it was 565,000 and that compares to where we are today at 512,000 square feet and about 80% of those leases were rejected. So it has tapered off compared to 2017.
But in terms of like a basis point impact on same store?
If I were to look at 2018, generally, a lot of that square footage that Tom just rattled off was anchors. So it was Sears, it was Bon Ton. There was less in the small shop area. So it was probably less of a same center impact in 2018 than it was in 2019, which was predominantly small shop square footage. So same center was heavily impacted.
I don't have a figure for you offhand. Linda, we can take that offline if you'd like, but I don't have a figure. But again, in terms of order of magnitude, I think 2017 was much more heavily impacted in terms of same center NOI than 2018.
Thanks. And then in terms of the increase in bad debt from $0.03 to $0.05 does this include Forever 21 and Barney's?
No. This really is a function of writing rents for the brands that have closed already. So it's the Things Remembered and Payless and Charlotte Russe and all the Gymboree brands as well as a random scattering of others. No, it has nothing to do with the other retailers that you mentioned.
Thanks. And then just one last one. In terms of temporary occupancy, you said it's at 6.5%. Where do you think it will be at year end? And at what point would you expect it to come down?
Yes. Again, I think it will tick up a bit towards the end of the year, as I mentioned to Mr. Sullivan. I would expect that, however, to really start coming down over the next couple of years. It's natural to assume that as we get 400,000 square feet back that we're going to have a combination of permanent replacements as well as opportunistic temporary replacements for that space.
And so I do think we'll see a significant conversion to longer term higher rent paying uses in 2020 and 2021 and we'll see the operating impact positive operating impact of that activity. So again, a tick up towards the end of the year and then I would certainly see that dropping as we move forward.
Thank you.
From Bank of America, we'll hear from Craig Schmidt.
I was looking in the sales per square foot chart and it listed centers on redevelopment Paradise Valley. What is the redevelopment that you're doing at Paradise Valley?
Well, Paradise Valley, we've got the potential to do mixed use entertainment. The department stores are fairly productive there, but there is it's very well located and there's a significant amount of demand for other uses. So that will probably be a combination of things. It won't be more retail, be less retail, more mixed use.
Okay, great. I guess in a similar vein, the Sears that you recaptured at Town Mall, with the lower sales per square foot productivity, would you expect that repurpose to be non retail?
It could be. We're still working on that one Craig. For example at Wilton which kind of falls in the same category, we've got a hospital that's going to take that space and put in medical office and the clinic. And I would expect something similar to be the ultimate outcome at Town.
Great. Thank you.
Thanks, Craig.
Next we'll hear from Alexander Goldfarb with Sandler O'Neill.
Hey, good morning out there. Just two questions. First, Tom, on the JV front, to the earlier question, you said that it would generate large capital gains. So just trying to think, I know you reaffirmed the commitment to the dividend, which we appreciate. But if you sell joint venture stakes, presumably earnings come down, which I would think would affect the dividend, but if selling stakes in the malls is going to result capital gains that may have to be distributed, why do that if you have the $250,000,000 to $400,000,000 a year incremental refinancings that from as you refinance your malls, why wouldn't that be preferable to selling stakes in malls that could pressure the dividend, but you may have to special dividend out?
Well, if the goal is to generate liquidity, we wouldn't get in a situation where we sold something that would trigger a special dividend. So that's one reason you straddle year end with the transaction. So part of it will fall into the 2020 dividend and part of it would fall into 2019. From our standpoint, we've got plenty of liquidity, but if we can achieve some favorable pricing on some of these transactions we're in discussions on, then it's a good way to generate some additional equity. And so that's what we're pursuing.
But I do not think no matter what we would do, it wouldn't result in a special dividend. It just might mean that the entirety of our current dividend is taxable.
Okay. But I guess also what you're saying is that any JV would not impact the current dividend payout?
Well, if it's a $3 dividend today and under normal circumstances about 60% to 65% of that's ordinary income And that would mean that the other 35% or 40% is either going to be 2 things. It's going to be return of capital or it's going to be capital gain. So if we execute on these JVs that other 40% of the current dividend would be capital gain, not return to capital.
Right. But I guess what I'm saying is if you JV something, you don't have the earnings from those assets, so FFO would go down. Wouldn't that necessitate resizing of the common dividend or not necessarily?
No. It would have no effect on the dividend. And it depends on the asset. A low cap rate asset isn't going to be dilutive to FFO.
Okay. And then just second is for Scott. And maybe I'm mixing up my terms, so I apologize. You budget every year 100 basis points for bad debt, but you said you're running 175 to 200 basis points. Am I mixing different parts of it?
Or is it just that you're running ahead, but because of all the leasing, you're still within the overall 100?
Yes. So just to clarify, coming into the year, we had a basket of reserves to account for all the bankruptcies that were in front of us. As the year has progressed, our bad debts have been elevated by about 50 basis points versus what we anticipated. And frankly, the bankruptcies were heavier than we anticipated too, Alexander. And that's really driven by the pace of closures.
Roughly 80% of the over 500,000 square feet that did file ultimately closed. So that was significantly in excess of what we thought. So I guess cutting through it, the impact was greater than what we anticipated, yet we're still affirming guidance.
Okay. Okay. That's helpful. Thank you, Scott.
From Citi, we'll hear from Christy McElroy.
Hi, thanks. Good morning. Just following up on the Sears boxes, previously you had talked about 4 of the wholly owned that had closed that you thought you'd get back, but I think you only got 3. What happened to that other one that closed? And I'm realizing that you pulled the boxes out of the same store pool, but can you quantify the sort of residual any residual co tenancy impact from these closures that could hit in Q3?
Yes, I'll take the first part of that. There's one series that closed, Christy, that the lease has not been rejected yet. So we don't control that one yet. So that was the difference. And then on co tenancy, it's very immaterial.
Yes, correct. I don't expect any co tenancy impact from the closure of those boxes.
Okay. And then with regard to the new disclosure on the Sears boxes and the redevelopment, thank you for that. Are the projected yields based on the incremental spend from here or is it incorporating also the full cost of the $150,000,000 when you entered the Cerrodis JV? And I'm just sort of trying to do the math. If you start capitalizing the interest on that $150,000,000 now, when the projects start to come online, you'll have the you'll get the benefit of the NOI, but it will also be partially offset by sort of that full impact of the expensing of the interest previously capitalized both on the original cost and the incremental spend?
Yes, Christy, hi, it's Scott. The yields are based on incremental costs from here on out. They do not include the basis. And just bear in mind that the basis for that for those 9 Seritage boxes includes all 9 centers. There were 7 centers that we have under redevelopment, 2 that are going forward stores for Sears in which we've already repurposed half of the box.
And so you can really kind of apportion out the $150,000,000 of total basis on a pro rata basis, 7 over 9 to figure out what's going to be capitalized and what's not.
Okay. So how much of the $150,000,000 is it sort of just doing the math, the $7,000,000 out of the $9,000,000
It's about $115,000,000 $120,000,000 offhand.
Okay. Thank you.
You bet.
And we'll hear from Shivani Choudhary with Deutsche Bank.
Just following up earlier on Forever 21 and Barneys. And apologies if I missed this earlier, but is there any update you can share there from a store closure perspective or initial expectations with regards to Forever 21 specifically?
Yes, we've had multiple discussions with Forever 21 and their advisors. And at this point, we don't believe that any concessions that we're going to be making will be material. We've got 30 stores for them and it's possible that a few might close, but it won't be significant to our overall rent in our guidance for 2019. Those discussions are underway. It's a little early to conclude anything yet.
But based on what we've heard from them, we don't think it's going to be material.
Okay. And as to Barneys, we have only 2 locations in the portfolio. So it's also not material.
Excellent. And then Doug, you had mentioned the strong leasing demand and velocity in the quarter. Can you give us an idea of how much of the 2019 expirations have been addressed? And as you're looking to 2020 or 2021, has anything changed with how the Macerich team is looking to defensively get ahead of potential watch list and answer on the renewal list?
Expirations have been addressed in one form or another. We're either we either have signed leases or we're at lease. In terms of 2020, we're probably between 40% 50% committed at this point. So we are pretty far out ahead of 2020.
Thanks so much.
And we'll next hear from Nick Lugo with Deutsche Bank.
Hi. Tom, I appreciate all the commentary about the dividend and how the company has no intention to cut the dividend. But if you look at your dividend yield today, it's high and investors seem to be pricing your stock as if there's some risk of a dividend cut. So what do you think the market's missing about your ability over the next year or 2 to create better cushion on the current dividend?
Well, Nick, as I said, our AFFO covers the dividend. Given the JV transactions we're considering, we probably will be generating some additional taxable income. So we have no intention to cut the dividend. And frankly, if we do those JVs, there's no room to cut. So we're comfortable with where the dividend is today.
And can you just remind us where you're at in terms of your taxable income versus your dividend?
Yes, I mentioned that to Alex a minute ago. In a typical year, 60% or so of the dividend is ordinary income. And then the balance is either going to be return of capital or it's going to be capital gain. And in this particular year, given the transactions we're considering, it's most likely going to be capital gain, that return of capital, which means the entire $3 dividend today would be taxable.
All right. That's helpful. And just to be clear, I mean, when you're talking about the additional financings that you could do to raise funds over the next couple of years, does the JV sale, if that happens, does that allow you to not have to lever up so much?
Well, it depends on how you use those proceeds. Those proceeds could be used to delever. I mean, typically, when we finance an asset, we finance it to a 50 5% to 60% loan to value and we've always done that for the past 25 years as a public company and that's the way we would continue to finance our properties. These are mostly deals that are done with life companies. And so it's institutional underwriting and I don't think it would have changed our approach to financing whether we do the JVs or not.
I guess I'm just wondering how it's going to work from a debt to EBITDA standpoint if presumably a lot of this funding is going towards redevelopment of Sears or other situations where you're not getting the EBITDA benefit Well, if we do the JVs, Nick, we paid out debt, debt to EBITDA is going to
be Well, if we do the JVs, Nick, when we pay down debt, debt to EBITDA is going to go down.
But if you don't do them if you don't pursue the JVs, should we assume that you're willing to take your debt to EBITDA up as a company?
Well, we look at a lot of things when it relates to the balance sheet. It's not just one metric. For example, if you look at the interest coverage ratio, it's a very healthy 3.3 times. If you look at the maturity schedule, it's layered out very nicely at 5 point 2%. If you were to use a more traditional leverage metric like loan to value, even using the consensus estimate for NAV, that would put loan to value at about 45%.
And that's not a level we're uncomfortable with.
All right. Thanks, Tom. Appreciate it.
Okay.
Next up is Caitlin Burrows with Goldman Sachs.
Hi there. I guess I was just wondering on the redevelopment costs for the 10 Sears boxes that you recaptured in the quarter, $250,000,000 to $300,000,000 which I think was the cost anticipated as of last quarter for Sears redevelopment, but that was for a larger set of stores. So if that is the case, I was wondering what changed about the redevelopment plans to bring the cost up and what's the status of the remaining 6 stores that were previously listed as in the shadow redevelopment pipeline?
Yes. Caitlin, it's Scott here. We have place we do have a placeholder earmarked for future phases. And I think our initial commentary starting last fall was 2 50 to 300 over several years. I don't think that thinking has necessarily changed.
In terms of the projects that are in front of us between the two categories, both adaptive reuse as well as mixed use densification, that totals roughly, what do we have, 180 to 205. And the balance really is future phases, which are probably going to be centered on some of the mixed use projects like Los Cerritos and Washington Square. So again, market driven, we would anticipate that potentially we'll be spending some more money to densify those assets. Bear in mind also that we may be considering joint ventures with mixed use experts. So it's really hard to pinpoint with clarity exactly how that's going to unfold.
But $250,000,000 to $300,000,000 still seems right over several years in the context of what I just mentioned.
Got it. Okay, that's all. Thanks.
With Green Street Advisors, we will hear from Vince Tibone.
Good morning. Could you guys help me understand the components of same property NOI growth in the Q2? I mean, occupancy was down only modestly, base rent was up about 4%, spreads were good. I'm just trying to get a sense of why same property was only up 90 bps. Can you help me bridge the gap there?
Yes. I think the biggest impact is the closures, Vince. We've heavy impact on the closures from bankruptcies, again, 400,000 square feet, the lion's share of which was already closed by the end of the Q1 is really what's weighting us down from the same center standpoint. Just pointing back to the comments I made previously, bad debts are elevated. They were elevated by $1,000,000 a quarter.
That's a 50 basis point impact on each quarter. So that's part of it. And then you've got the lost rental income associated with those as well, which is dragging us down. So in aggregate, I mentioned it's a bracketed 175 to 200 basis point weight on the year. And I think that's what we saw in the Q2 as well.
But shouldn't that flow through to occupancy? Or is it kind of is it the temp Tennessee that's up or maybe rent relief packages weighing down? Like it just I'm still having trouble understanding because everything should flow through occupancy eventually, correct? And that was only down 20 basis points?
Yes. But Vince, you're correct. Temporary occupancy is part of it. Temporary occupancy is up almost 0.5% over a year ago. And typically on a temporary lease we're going to get if we're fortunate half the rent you would get on a permanent lease.
So that's why the big push to convert temporary to permanent, but that had a bearing on the quarter as well.
And then are you still able to quantify rent relief impact in the quarter?
I don't think there was a significant amount of rent relief in the quarter. I mean most of the bankruptcies filings were closures, they weren't restructurings.
Okay. Thank you.
Our next question is from Michael Mueller with JPMorgan.
Yes. Hi. Can you give
us a sense as to
how much lower debt to EBITDA could go because of the JV sales? Could we be looking at something, say, a point or more?
Mike, I think that the range of equity we're talking about was in the range of $500,000,000 to $600,000,000 and that would move it down probably 75 basis points to 100 depending on the amount of leverage on the individual asset as well as the amount of equity we generate.
Got it. Okay. Thank you.
Thanks.
From BMO Capital Markets, we'll hear from Jeremy Metz.
Hey, Dom. As you kind of think about the capital needs here and leverage, obviously, you talked about the joint venture, but where does monetizing even more of the potential mix use optionality that you have in the portfolio fall into that playbook? You obviously have some great unused dirt. You mentioned designing a couple of hotel deals. So is that a lever you're looking at and considering hitting even more?
We always consider it. From our standpoint on the hotel deals, it makes more sense for us to do ground lease deals, but we could also sell the land potentially. But those are all things we would consider, Jeremy.
All right. Doug, you mentioned the 2% bankruptcy impact and the minimal impact that ultimately had to occupancy. How much is actually getting that bankrupt space back and release versus other vacancy leasing up? For example, Queens going from 90 2% in the Q1 to 99% that's just more leasing up space there versus replacing vacancies?
Yes. Just to put it in perspective, year to date, we've had 13 bankruptcies totaling about 512,000 square feet. 82% of that or about 415,000 Square Feet was rejected and closed. And as of today, we're about 54%, 55% committed in terms of leased.
Thanks. And with Morgan Stanley, we'll hear from Rich Hill.
Hey, good afternoon, guys. I wanted to just quickly talk about the management fees. It looks like you've done you continue to do a pretty good job of bringing those down. How do you think we should think about those going forward? Is this sort of the steady state?
Or do you think there's more room to optimize that?
Well, Rich, we've gone through some significant cuts both in terms of G and A as well as management company expenses. I think 2nd quarter is probably a pretty good run rate for the year. Got it. Thank you.
And that
would be true of not just management expenses, but also G and A. I think that's a good run rate.
Thank you. And then if I'm looking at other rental income for both consolidated and JV assets, it looks like that was down. Is there anything specific that drove the other rental income down? I guess it's actually other rental income just for the consolidated assets. But is there anything that drove that?
And is that sort of declines something that we should think about? Or is it more one off?
Are you referring to leasing revenue, Rich? Or are you referring to other income? I'm not clear.
No, I'm referring to other rental income. I'm sorry, I miss spoke when I was referring to JV and consolidated. So just focusing on other rental income in the consolidated properties.
Yes. I kind of look at it overall and it's fairly consistent when you look at the whole portfolio at share. And in fact, I think if you look at the whole portfolio at share, it's probably taken up just a touch. Our business development, we do have a disclosure that shows business development income and that's up by about $1,000,000 as a function of advertising and vending and parking revenue and a lot of some resources. So on an overall basis, not just consolidated, but on an overall basis, we see that actually elevated slightly.
So and I think that's just a function of our continued focus on driving ancillary revenue.
And this concludes today's question and answer session. Tom O'Hern, at this time, I'd like to turn the conference back to you for any additional or closing remarks.
Thank you, Amy. Thanks everyone for joining us today. We look forward to seeing and speaking with Men of You over the coming months and hope everybody has a great summer. Thank you.
This concludes today's conference. Thank you for your participation. You may now disconnect.