Please stand by as we're about to begin. 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 second quarter 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-K with the SEC, which are posted in the investor 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 Healey, Executive Vice President, Leasing.
With that, I would like to turn the call over to Tom.
Thank you, Jean, 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 and 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, and Spaces. There's 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 Life Time, 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 Round1, 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. In fact, last week we approved three hotel ground lease deals, a Marriott, a Hotel Indigo, and 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, seven of which are in our 50/50 joint venture with Seritage, and that includes Los Cerritos, Washington Square, Vintage Faire, Chandler, Arrowhead, Deptford, and South Plains Mall. Plus, we have two 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 two 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 approximately $80 million-$95 million for these projects, with yields ranging from 8%-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 non-traditional mall uses. We estimate the cost for those projects to be between $100 million and $120 million, with yields ranging between 8.5% and 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 multi-family, 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 former Barneys box. That's generated a tremendous amount of retail interest and 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 first quarter 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 2021. As a result of Scottsdale's multifaceted redevelopment, we continue to see extremely strong sales growth and customer traffic.
Comp sales are 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 Wonderspaces. At the Fashion District of Philadelphia, tenant construction is progressing within the four-level retail and entertainment hub spanning over 800,000 sq ft 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 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 tenant for 90% of the leasable space, including Century 21, Burlington, H&M, Nike, Forever 21, AMC, Round One, City Winery, and Wonderspaces. The project will open in phases with the holiday occupancy expected to be approximately 70% and stabilized occupancy anticipated in late 2020. At the Los Angeles Premium Outlets site, the Carson Reclamation Authority continues its horizontal site work to support the project. Our 50/50 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 at those projects where we're 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. 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 second quarter of 2018, which was $0.83 per share. The primary elements of the $0.05 improvement during the second quarter were the one-time activism costs incurred in the second quarter of 2018, totaling $0.13, offset by $0.04 of dilution from greater leasing expenses recognized in the second quarter 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 second quarter of 2019 relative to the second quarter 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%-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%. Year- to- date, EBITDA margins were up nearly 130 basis points through June 30 versus the first six 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-K supplemental financial information for more details of the company's guidance assumptions.
Regarding our financing activity, the following summarizes the current status of our 2009 plans. In June, we closed a $220 million 10-year fixed rate financing on SanTan Village in Gilbert, Arizona at a fixed rate of 4.3%. The transaction produced $85 million of incremental proceeds at Macerich's share. Also in June, we closed a $256 million five-year fixed rate financing on Chandler Fashion Center in Chandler, Arizona at a fixed rate of 4.1%, yielding $28 million 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 two separate deals are expected at very attractive levels in the mid 3% range. Combined incremental proceeds that the company shares should exceed $140 million. Both loans are expected to close near the end of the third quarter. We are currently at 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 737 per square foot, Kings Plaza is reaping the benefits of our recent redevelopment investments. We do anticipate a very positive market reception for financing this property.
We expect the deal to close within the fourth quarter. Collectively, these financings represent a nine-asset financing plan for 2019, which is progressing quite well, and that when complete, we expect to exceed $2 billion in volume and to generate over $600 million in liquidity to the company. Looking forward over the next several years, we do anticipate incremental financing proceeds of $250 million-$400 million per year. Today, we have over $700 million in capacity on our revolving line of credit, which is $1.5 billion in total and expandable up to $2 billion. 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 and operating environment.
Thanks, Scott. In the second quarter, sales and occupancy remained strong and the leasing momentum continued. Portfolio sales ended the second quarter at $776 per square foot, which represented a 12.1% increase from $692 per square foot on a year-over-year basis. Economic sales per square foot, which are weighted based on NOI, were $896 per square foot, and that's up 11.3% from $805 per square foot a year ago. Quarter-end occupancy was 94.1%. That's down 0.2% from the end of the second quarter 2018, and down 0.6% from the end of the first quarter 2019. Trailing 12-month leasing spreads were 9.4%, compared to 11.1% at December 31st, 2018. Average rent for the portfolio was $61.17, and that's up 4% from $58.84 one year ago. Consistent with the first quarter, leasing volumes remained extremely strong in the second quarter.
During the second quarter, 208 leases were signed for a total of 729,000 sq ft, bringing the year-to-date total to 1.6 million 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 sq ft lease with Life Time Fitness at The Oaks. We signed Aldi in 22,000 sq ft at Green Acres Commons, Round1 Bowling in 66,000 sq ft at Freehold Raceway Mall, and Industrious in 31,000 sq ft at Country Club Plaza. This is our third 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, J. 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 & Reel at Green Acres, and Goddess and the Baker at Northbridge. We also signed a nice six-store package with A&F's emerging brand, Abercrombie Kids, where we captured six of their 15 2019 open-to-buys. Lastly, in terms of executing leases, it was another great quarter for the Fashion District of Philadelphia. We signed 14 leases totaling 63,000 sq ft, including Aéropostale, American Eagle, Eddie Bauer, Express, GameStop, Pandora, and Wonderspaces. We opened 64 new tenants in the second quarter, totaling 154,000 sq ft.
In the experiential category, in addition to Crayola at Chandler and Wonderspaces at Scottsdale, both of whom opened in the second quarter, we are very pleased to welcome the Cayton Children's Museum to Santa Monica Place. It opened in 20,000 sq ft on June 30th to enormous fanfare, as it's the only one of its kind in all of Los Angeles. The Cayton 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. Without a strong leasing environment, there's no doubt we would have seen greater occupancy loss as a result of these bankruptcy closings. Never has a 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. 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. 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 True Food Kitchen. It's about fitness like Life Time, Equinox, and 24 Hour. It's about theaters and entertainment like Harkins, Cinemark, Dave & Buster's, Round1, and Rec Room. It's about experiential, like Candytopia, Crayola, and Wonderspaces. It's about digital, like Casper, Morphe, and Madison Reed. It's about co-working like Industrious, WeWork, and Spaces. 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 underperforming 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. Whomever 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 to everybody. 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, we continue to merchandise our properties with offerings that are among the best in the industry. With that, we'll turn it over to the operator to open up the call for Q&A.
Thank you, sir. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are 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 will be limiting today's call to one hour today. Therefore, we ask that you limit your questions to one question and one follow-up, and then please re-queue up again so everyone has an opportunity to ask a question. We'll pause for just a moment to allow everyone the opportunity to signal for questions. We'll take our first question from James Sullivan with BTIG.
Thank you. Tom and Doug, I guess, for this first question, the temporary tenancy number rose back in the first quarter. You detailed that in the call. 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. 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. 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 rent. We should see significantly elevated rents, and I think that'll be an important and critical operating cash flow tailwind for us over the next couple of years. 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, no firm numbers were provided. However, I think the comment was that the expectation at the end of the first quarter in this respect is that same property NOI growth should return to more historic levels, which had been 3% + in 2020. We're 90 days on here. I'm just curious if management's 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 third and fourth quarter. As we are moving through the backfilling the bankruptcies, we're 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, you guys have done a good job from the volume standpoint. As we think about your watch list and sort of your tenant restructurings going on, 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. As you think through the next two to three years, is that kind of the new normal, or does that come down, you think?
Yes, Samir, this is Scott. Good morning. 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. 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 versus what it's been historically. Again, none of these bankruptcies are a surprise to us.
The brands that have failed were brands that had too much debt on their balance sheet or were long underperformers within our portfolio. None of this has been a surprise. We do see the list shrinking. I think the fundamental point is we do see 2019 not being negatively impacted from what we see today relative to our guidance.
Okay. I guess, just as a follow-up, Scott, can you walk us through your NOI guidance? You're tracking ahead of schedule. You've 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, Samir. Naturally, with the heavy volume of bankruptcies, we've seen over 400,000 sq ft close within the first half of the year. Those closures are naturally going to have a drag on the second half. We do have that embedded within our thinking. Let me frame the impact of the bankruptcies just to kind of put this in perspective. 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 million 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. We expect that to continue during the second half of the year.
If I were to look at the impact of bankruptcies as a whole on 2019, both between bad debts as well as reduced rental income, I'd frame the impact at roughly 175-200 basis points of impact on same center NOI for 2019. That's really our perspective. Bankruptcies have had a heavy impact. That'll give you an idea of what the sense of the impact is in terms of order of magnitude, and we do expect that will have an impact on the second half.
Okay, thanks very much.
If you find that your question has been answered, you may remove yourself from the queue by pressing the star key followed by the digit two. 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 second quarter that would have an impact going forward?
Yeah, sure. I don't have that number quantified. Sears, we did collect roughly a month and a half of rent 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 first quarter. There were some that spilled into April. I think for the most part, we've seen the impact as of the end of the first quarter. There's a little bit trickling in. I don't see a huge impact, though, from either one of those.
Also bear in mind from Sears, you've got the offsetting impact of placing the development or the cost into 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. 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 one 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. 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. 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 to the beginning of 2020.
Okay. Thank you.
From Barclays, we'll hear from Linda Tsai.
Hi. In terms of the impact of closures on same store for 2019, you said it was 175 - 200 basis points. For context, could you remind us what the impact was in 2018 and also 2017, which was a bigger year in terms of closures?
Yeah, Linda. 2017, we had total square footage of 970,000 sq ft, so almost twice of what it was today. It abated a little bit in 2018 for the year, excluding the department stores, it was 565,000. That compares to where we are today at 512,000 sq ft. About 80% of those leases were rejected. It has tapered off compared to 2017.
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. It was Sears, it was Bon-Ton. There was less in the small shop area, it was probably less of a same center impact in 2018 than it was in 2019, which was predominantly small shop square footage. Same center was heavily impacted. I don't have a figure for you offhand, Linda. We can take that offline if you'd like, I don't have a figure. In, again, in terms of order of magnitude, I think 2017 was much more heavily impacted in terms of same center NOI than 2018.
Thanks. Then in terms of the increase in bad debt from $0.03 to $0.05, does this include Forever 21 and Barneys?
No. This really is a function of riding out pre-petition rents for the brands that have closed already. 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. Just one last one. In terms of temporary occupancy, you said it's at 6.5%. Where do you think it'll be at year-end, and at what point would you expect it to come down?
Yeah, again, I think it'll 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 years. It's natural to assume that as we get 400,000 sq ft back, that we're going to have a combination of permanent replacements as well as opportunistic temporary replacements for that space. I do think we'll see a significant conversion to longer-term, higher rent-paying uses in 2020 and in 2021, and we'll see the positive operating impact of that activity. 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 it's very well located, and there's a significant amount of demand for other uses. That will probably be a combination of things. It won't be more retail. It'll be less retail, more around 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, Wilton, which kind of falls in the same category, we've got a hospital that's gonna take that space and put in a medical office and a clinic. 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. 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. If selling stakes in the malls is gonna result in capital gains that may have to be distributed, why do that if you have the $250 million-$400 million a year incremental refinancings 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?
If the goal is to generate liquidity, we wouldn't get in a situation where we sold something that would trigger a special dividend. That's one reason. You straddle year-end with the transactions, so part of it will fall under the 2020 dividend, and part of it would fall under 2019. From our standpoint, we've got plenty of liquidity. 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. That's what we're pursuing. 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. 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, under normal circumstances, about 60%-65% of that's ordinary income, that would mean that the other 35% or 40% is either gonna be two things. It's gonna be return of capital, or it's gonna be capital gain. If we execute on these JVs, that other 40% of the current dividend would be capital gain, not return of capital.
Right. 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. It depends on the asset. A low cap rate asset isn't gonna be diluted to FFO.
Okay. 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 175-200 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?
Yeah. 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 years progressed, our bad debts have been elevated by about 50 basis points versus what we anticipated. Frankly, the bankruptcies were heavier than we anticipated, too, Alexander. That's really driven by the pace of closures. Roughly 80% of the over 500,000 sq ft that did file, ultimately closed. That was significantly in excess of what we thought. I guess, cutting through it, the impact was greater than what we anticipated, yet we're still affirming guidance.
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 four of the wholly owned that had closed, that you thought you'd get back, but I think you only got three. What happened to that other one that closed? I'm realizing that you pulled the boxes out of the same-store pool, but can you quantify any residual co-tenancy impact from these closures that could hit in Q3?
Yeah, I'll take the first part of that. There's one Sears that closed, Christy, that the lease has not been rejected yet, so we don't control that one yet. That was the difference. On co-tenancy, it's very immaterial.
Yes, correct. I don't expect any co-tenancy impact from the closure of those boxes.
Okay. 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 million, when you entered the Seritage JV? I'm just sort of trying to do the math. If you start capitalizing the interest on that $150 million now, when the projects start to come online, you'll get the benefit of the NOI, 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.
Yeah, Christy. Hi. It's Scott. Excuse me. The yields are based on incremental costs from here on out. They do not include the basis. Just bear in mind that the basis for those nine Seritage boxes includes all nine centers. There were seven centers that we have under redevelopment, two that are going forward, stores for Sears, in which we've already repurposed half of the box. So you can really kind of apportion out the $150 million of total basis on a pro rata basis, seven over nine, to figure out what's going to be capitalized and what's not.
Okay. How much of the $150 million is it, sort of just doing the math, the seven out of the nine?
It's about $115 million-$120 million offhand.
Okay. Thank you.
You bet.
We'll hear from Shivani Sood with Deutsche Bank.
Hi. Good afternoon. Just following up earlier on the earlier question on Forever 21 and Barneys. Apologies if I missed this earlier, but is there any update you can share there from a store closure perspective or initial expectations, in regards to Forever 21 specifically?
Yeah. We've had multiple discussions with Forever 21 and their advisors. 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 with them, and it's possible that a few might close, but it won't be significant to our overall rent and 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.
As to Barneys, we have only two locations in the portfolio, so it's also not material.
Excellent. 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? 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 tenants on the renewal list?
Yeah. I would say in terms of 2019, virtually all of the lease expirations have been addressed in one form or another. We either have signed leases or we're at lease. In terms of 2020, we're probably between 40% and 50% committed at this point. We are pretty far out ahead of 2020.
Thanks so much.
We next hear from Nick Luca with Deutsche Bank.
Oh, hi. Tom, I appreciate all the commentary about the dividend and how the company has no intention to cut the dividend. 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. What do you think the market's missing about your ability over the next year or two to create better cushion on the current dividend?
Well, Nick, as I said, our AFFO covers the dividend. We are expecting accelerating same-center NOI growth going forward. I also mentioned that, given the JV transactions we're considering, we probably will be generating some additional taxable income. We have no intention to cut the dividend. Frankly, if we do those JVs, there's no room to cut. We're comfortable with where the dividend is today.
Can you just remind us where you're at in terms of your taxable income versus your dividend?
Yeah. 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. In this particular year, given the transactions we're considering, it's most likely going to be capital gain, not return of capital, which means the entire $3 dividend today would be taxable.
All right. That's helpful. Just to be clear, 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 de-lever. Typically, when we finance an asset, we finance it to a 55%-60% loan-to-value, and we've always done that for the past 25 years as a public company. That's the way we would continue to finance our properties. These are mostly deals that are done with life companies, it's institutional underwriting, I don't think it would change 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 right away. It seems like there's some risk that your debt- to- EBITDA goes up over the next year.
If we do the JVs, Nick, we pay down debt, debt- to- EBITDA is going to go down.
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 x. If you look at the maturity schedule, it's layered out very nicely at 5.2. 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 million-$300 million, which I think was the cost anticipated as of last quarter for Sears redevelopment, but that was for a larger set of stores. 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 six stores that were previously listed as in the shadow redevelopment pipeline?
Yeah, Caitlin. Hi, it's Scott here. We do have a placeholder earmarked for future phases, and I think our initial commentary, starting last fall, was $250 million-$300 million 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 intensification, that totals roughly, what are we at? $180 million-$205 million, 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. 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.
It's really hard to pinpoint with clarity exactly how that's going to unfold, but $250 million-$300 million 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.
Hey, good morning. Could you guys help me understand the components of same-property NOI growth in the second quarter? 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 basis points. Can you help me bridge the gap there?
I think the biggest impact is the closures, Vince. Heavy impact on the closures from bankruptcies. 400,000 sq ft, the lion's share of which was already closed by the end of the first quarter, is really what's weighting us down from a same center standpoint. Pointing back to the comments I made previously, bad debts are elevated. They were elevated by $1 million a quarter. That's a 50-basis-point impact on each quarter, that's part of it. You've got the lost rental income associated with those as well, which is dragging us down. In aggregate, I mentioned it's a bracketed 175-200 basis point weight on the year, and I think that's what we saw in the second quarter as well.
Shouldn't that flow through to occupancy? Is it the temp tenancy that's up or maybe rent relief packages weighing down? I'm still having trouble understanding, because everything should flow through to occupancy eventually, correct? That was only down 20 basis points.
Vince, you're correct. Temporary occupancy is part of it. Temporary occupancy is up almost a half a percent over a year ago. Typically, on a temporary lease, we're going to get, if we're fortunate, half the rent you would get on a permanent lease. That's why the big push to convert temporary to permanent. That had a bearing on the quarter as well.
Are you 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 JP Morgan.
Yeah. Hi. Can you give us a sense as to how much lower debt-to-EBITDA could go because of the JV sales? Would we be looking at something, say, a point or more?
Mike, I think the range of equity we were talking about was in the range of $500 million-$600 million, and that would move it down probably 75 basis points-100 basis points, 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, Tom. As you think about the capital needs here and leverage, obviously you talked about the joint venture, where does monetizing even more of the potential mixed-use optionality that you have in the portfolio fall into that playbook? You obviously have some great unused dirt. You mentioned assigning a couple hotel deals. 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, we could also sell the land potentially. 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 re-leased versus other vacancy leasing up? For example, Queens going from 92% in the first quarter to 99%. That's just more leasing of space there versus replacing bankruptcies.
Yeah, Jer. Just to put it in perspective, year- to- date, we've had 13 bankruptcies totaling about 512,000 sq ft. 82% of that, or about 415,000 sq ft, was rejected and closed. As of today, we're about 54%, 55% committed in terms of leased.
All right. Thanks.
With Morgan Stanley, we'll hear from Rich Hill.
Hey, good afternoon, guys. Wanted to just quickly talk about the management fees. It looks like 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 stay steady, or you think there's more room to optimize that?
Well, Rich, we've gone through some significant cuts, both in terms of G&A as well as management company expenses. I think second quarter is probably a pretty good run rate for the year.
Got it. Thank you.
That would be true of not just management expenses, but also G&A. I think second quarter.
Got it.
Is a good run rate.
Thank you. 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 that's actually other rental income just for the consolidated assets. 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.
I'm referring to other rental income. I'm sorry, I misspoke when I was referring to JV and consolidated. Just focusing on other rental income in the consolidated properties.
Yeah. I kind of look at it overall, and it's fairly consistent when you look at the whole portfolio at share. In fact, I think if you look at the whole portfolio at share, it's probably ticking up just a touch. Our business development, we do have a disclosure that shows business development income, and that's up by about $1 million as a function of advertising and vending and parking revenue and a lot of sundry sources. On an overall basis, not just consolidated, but on an overall basis, we see that actually elevated slightly. I think that's just a function of our continued focus on driving ancillary revenue.
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 many 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.