Good day, and welcome to the Macerich Company 4th Quarter 2018 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 for joining us today on our Q4 2018 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 maceridge.com.
Joining us today are Tom O'Hern, CEO 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 Scott.
Thanks, Jean. Excuse me. The Q4 reflected generally good operating results as evidenced by the strength of most of our portfolio's key operating metrics and an improvement in same center net operating income growth. As we mentioned numerous times on our last few earnings calls, bankruptcies and early terminations in 2017 tempered growth in the first half of twenty eighteen as we work through releasing of that space. As predicted, we realized stronger operating growth in the second half of twenty eighteen.
Here are some highlights for the quarter. FFO per share was $1.09 per share, which beat our guidance and met consensus estimates. Annual FFO per share was $3.85 excluding $0.13 excuse me, for activism related costs incurred earlier during 2018. This was in line with our guidance of $3.82 to $3.87 per share. Year end occupancy was 95.4 percent, up 40 basis points from year end 2017 and up 30 basis points from September 30, 2018.
Half of this gain of 40 basis points was temporary occupancy. Same center growth in net operating income excluding lease termination revenue was up 4 point 2% for the quarter or a 2.4% increase when including lease term revenue. During the quarter, we For the second half of twenty eighteen, we experienced 4% growth versus the second half of twenty seventeen when excluding lease termination revenue and 3.4% growth including lease termination revenue. The property operating margin for 2018 improved by 60 basis points to 70.0 percent, up from 69.4 percent for 2017. And REIT G and A and management company expenses collectively showed about a $2,300,000 improvement or reduction during the quarter.
Now on to 2019 guidance. While we have provided detailed operating guidance this morning, we thought it'd be useful to share a reconciliation of major components from actual 2018 FFO of $3.85 per share, excluding activism versus the 2019 guidance of $3.69 per share at the midpoint, which excludes a $0.15 year over year reduction we expect from the new lease accounting standard. Most of these assumptions are spelled out the guidance table within our supplemental filing from this morning, but this should help you to get from 2018 to 2019. 1, we anticipate approximately $0.10 of accretion from year over year savings in corporate overhead from our 2018 reduction in force and from other G and A reductions all net of tax. 2, we expect approximately increasing interest expense in 2019, driven primarily by increasing LIBOR and the impact of refinancings at higher rates.
3, we expect approximately $0.08 of dilution from lost rents from anchor lease terminations primarily from Sears. This is of course short term cash flow dilution while we execute on long term value creating opportunities within what is generally very well situated real estate. As of the end of 2018, several Sears stores had closed, but none of the Sears leases have been rejected to date and we have assumed rents for only the month of January for those closed locations. Depending upon what actions are taken by Sears and by the bankruptcy judge, this assumption could prove to be conservative. 4, we expect approximately $0.04 of dilution from the combination of reduced lease termination revenue, straight lining of rent and SFAS 141 income.
And then lastly, on the disposition front, a couple of factors. One, we anticipate approximately $0.03 of dilution from the carry forward impact of 2018 dispositions on 2019. And secondly, we generated approximately $0.03 of land sale gains in 2018 and we have not forecasted any land sale gains in 2019. Lastly, a few other notes regarding guidance. Other than Sears, there have been 3 major bankruptcy filings so far this year and we are prudently carrying reserves in anticipation of this and further tenant retailer fallout.
This is weighing down our anticipated operating growth in 2019. We also entered into numerous store leases new store leases and renewals upon lease expiration with a significant retailer at reduced rents. This will also weigh on 2019 operating growth. This retailer generally occupies big box locations and in line spaces greater than 10,000 square feet. We have no new acquisition or disposition activity planned within our 2019 guidance.
In terms of FFO by quarter, we estimate 22% in the 1st quarter, 24% in the 2nd quarter, 25% in the 3rd quarter and the balance within the 4th quarter. And lastly, more details of the guidance are obviously included within our 8 ks supplemental financial information that was reported this morning. Onto the balance sheet. As we highlighted for you last quarter, we expect to raise between $425,000,000 to $450,000,000 in liquidity from the company's mortgage refinancing activity during 2019. In early January, we closed on a $300,000,000 12 year fixed rate financing on Fashion Outlets of Chicago at a fixed rate of 4.58%.
This transaction yielded $100,000,000 of incremental proceeds, which were used to repay a portion of the company's line of credit. We are now close to entering into a commitment for a $220,000,000 10 year fixed rate financing on Santan Village in Gilbert, Arizona, which we anticipate closing in the 2nd quarter. This transaction would yield roughly $85,000,000 of incremental liquidity. We are currently marketing Chandler Fashion Center in Chandler, Arizona for a long term fixed rate financing of that market dominant Class A regional shopping center. And then later this year, we plan to refinance Kings Plaza.
Our product continues to be very much in favor within the debt capital markets. With that, I will turn it over to Doug to discuss the leasing and operating environment.
Thanks, Scott. In the Q4, sales and occupancy remained strong and leasing velocity continued. Portfolio sales ended the Q4 at $7.26 per square foot, which represented a 10% increase on a year over year basis. Economic sales per square foot, which are weighted based on NOI were $8.49 per square foot and that's up from $7.70 per square foot a year ago. Occupancy was 95.4% and this represented a 40 basis point increase year over year.
Trailing 12 month leasing spreads were 11.1% compared to 10.8% at September 30, 2018 and 15.2% for the year 2017. These leasing spreads included 32 leases with rent reductions at lease expiration. Excluding these 32 rent reductions, leasing spreads would have been closer to 13%. Average rent for the portfolio was $59.09 per square foot and that's up 3.7 percent from $56.97 per square foot a year ago. Leasing volumes were strong.
During the Q4, 279 leases were executed for a total of 984,000 square feet, bringing the total activity for 2018 to 825 executed leases for a total of just over 3,000,000 square feet. Notable leases signed in the Q4 include Google at Westside, Nordstrom at Country Club Plaza, a flagship Tesla at Santa Monica Place, Dick's Sporting Goods at Deptford, Dave and Buster's at Vintage Fair and Crayola Experience at Chandler Fashion Center. We also had a very significant opening in the 4th quarter and that was the luxury wing at Scottsdale Fashion Square. And we also opened a concept called Brand Box at Tysons Corner. Brand Box is a first of a kind technologically induced venue that provides flexible space for emerging brands to test bricks and mortar.
At 10,000 square feet, Brand Box opened 100% occupied with 5 emerging brands and 1 legacy brand who is looking to reinvent themselves. We're already talking to 3 of the brands to do a permanent long term deal elsewhere in the center, which of course is our ultimate goal. In addition, we opened 13 emerging brands in the Q4. Notables include Bonobos at Village of Corte Madera, Stance at Washington Square and Madison Reed and Invisalign at Broadway Plaza. We remain active in the restaurant and box categories with significant openings in the Q4 including Din Tai Fung at Washington Square, Cheesecake Factory at South Plains and Tokoya Organica at Kierland, Burlington at Lakewood, 24 Hour Fitness at Pacific View and Ross at Southridge.
Other key openings throughout the portfolio include Anthropologie at Chandler, Polo Outlet at Fashion Outlets of Chicago and 2 Hollister Stores at Green Acres and Victor Valley. Looking industry and leasing in particular, we remain cautiously optimistic as we focus on 2019 and beyond. The mood continues to improve, open to buys are more prevalent and brand extensions are once again being talked about. The labor market is good, gas prices are down, holiday 2018 was strong and consumers are in a spending mood. However, this does need to be somewhat tempered due to perceived economic headwinds in 2019 as well as continued store closures.
Traditional retailers that continue to reinvent themselves and focus on their product, their service, their experience are thriving. Great examples are Apple, American Eagle, Hollister, Vans and Sephora. Boxes, restaurants, fitness, theater, entertainment, experiential and international brands are all active. Our shoppers, especially the millennials and the Gen Zs, they want it all. They want the right stores.
They want food and beverage. They want aesthetics. They want to be served and they want to be entertained. And that's exactly what we're focused on at the property level. From our store selection to the service we provide to the experiences we create, Macerich continues to be an industry leader.
And lastly, I recently came across what I thought was a very interesting article written by the ICSC. In 2018, the ICSC commissioned an outside strategy and research firm to conduct a study that tracked retail web traffic and consumer brand awareness among emerging and established brands. The study is titled The How Bricks Impact Clicks. I'm sure many of you have read this study, but for those who haven't, I would strongly encourage you to do so. In the meantime, I'd like to point out 4 big takeaways.
Number 1, for existing retailers, opening 1 new physical store in a market results in an average 37% increase in overall traffic to that retailer's website. Number 2, increasing the number of physical stores by just 5% in a single market has significant benefit on digital engagement and web traffic. Number 3, for emerging brands, new store openings drive an average 45% increase in web traffic following a store opening. But the opposite is also true. Web traffic drops when retailers close stores.
In one retailer's case, the share of web traffic across markets where they closed declined up to 77%. So in conclusion, existing retailers have incentive to expand into new markets or to expand within existing markets. Existing retailers have reasons other than cost of occupancy to keep stores open in key markets and in key shopping centers. And lastly and most importantly, it is now proven that emerging brands have all the incentive in the world to open physical stores. And with that, I'll turn it over to Tom.
Thank you, Doug. We had a good Q4. If you look at FFO, diluted it grew by 6.5 percent to $166,000,000 compared to the Q4 of last year. Occupancy increased 40 basis points on a year over year basis. We had good leasing volumes, but releasing spreads are less still in double digits have moderated from 2017 levels.
Our malls continue to generate healthy traffic and certainly continue to generate positive sales growth and to attract relevant brands and concepts. As Doug mentioned, we continue to see the leasing tone change mostly for the positive. Legacy brands are clearly differentiated between those that continue to invest in their brand and product, their in store experience and into their omni channel strategies versus those that are struggling mainly because of the weight of historical leverage buyouts and related balance sheet issues. While we continue to see an improved leasing environment with generally strong retail sales, we do remain concerned over certain brands. Being able to recapture unproductive department store boxes within great malls will continue to provide significant redevelopment opportunities for us.
We have 2 compelling recent examples of that in Kings Plaza where we took an underproductive Sears store and replaced it with Zara, Burlington, Primark, JCPenney, which collectively will do 5 times the sales of the prior tenant. At Scottsdale Fashion Square, we replaced the Barney's department store with Apple and Industrious. You will see us do upgrades at other centers where we have the opportunity to recapture department stores. There's also demand for adding mixed use including residential, hotel, entertainment, health and wellness and office components. These are compelling opportunities for us to diversify our cash flow sources over the course of the next 5 years.
Looking at a prime example of this is Scottsdale Fashion Square where development continues on an 80,000 square foot exterior expansion, which includes restaurants and well recognized high end fitness club. The expansion is 100% leased and includes a tremendous collection of high end restaurants including Nobu, Ocean 44, Farmhouse and others. Within the former Barney's location, we opened a 2 level flagship Apple store which features extensive experiential and educational elements. In January, 2 weeks ago Industrious a national co working operator opened a 33,000 square foot premium co working space. It was the best opening they've ever had and far exceeded their typical opening day occupancy.
It is expected that Apple and Industrious will generate substantially more traffic in commerce than was previously generated by the 60,000 Square Foot Barney's department store box. Also at Scottsdale Fashion Square, we debuted a newly renovated and re tenanted luxury wing with an exciting lineup of new or newly renovated retailers including Gucci, Prada, Louis Vuitton, Cartier, Breitling, Saint Laurent, Omega, Saint John, Ferragamo and many more. In addition at Scottsdale Fashion Square, we're adding a hotel. Caesars Republic, a 2 66 room first of its kind non gaming Caesars brand will be built at the center. This 4 star hotel will be developed by a third party on a ground lease.
The hotel will be ideally located adjacent to the 80,000 square foot expansion. Turning now to Fashion District of Philadelphia. Construction continues on a four level retail and entertainment hub spanning over 800,000 square feet in the heart of downtown Philadelphia. We have signed leases or commitments from 85 percent of the leasable area. Notable tenants include Century 21, Burlington, H and M, Nike, Forever 21 AMC, Round 1 and City Winery.
At One Westside formerly known as Westside Pavilion, we along with our partner Hudson Pacific Properties recently announced that we've signed Google as the sole occupant the sole tenant to occupy approximately 600,000 square feet of Class A creative office space. The joint venture expects to invest approximately $500,000,000 to $550,000,000 and we expect to see an 8% return on this project. At Los Angeles Premium Outlets, the Carson Reclamation Authority has commenced its site work to support LA's newest outlet project. This is a fifty-fifty joint venture with Simon Property Group to develop a 566,000 Square Foot fashion outlet center with frontage along the heavily traveled I-four zero five freeway in Los Angeles. The project will open in 2 phases.
The initial 400,000 square feet is currently anticipated to be delivered in the fall of 2021. Last quarter, I shared details as to our remaining Sears stores. I'll briefly update you on the current status. We have 21 Sears stores and they're broken into different ownership groups. The first group is 9 Sears stores that are owned in a fifty-fifty joint venture with Seritage.
6 of those 9 are now closed and the 3 remaining open appear to be part of the Sears going concern portfolio, which includes Arrowhead, Danbury and Freehold. Both Danbury and Freehold already have been 50% converted to smaller Sears footprints by virtue of leasing half the space to Primark. These nine stores are some of our best malls with average sales over $800 per foot and we have plans for all of these locations with a wide range of opportunities including demolishing the box and repurposing the square footage with more productive uses. At this time, although 6 of these are closed, none of these leases have been rejected. So as of today, we do not control these locations yet.
Moving on to the 2nd group, 7 of the Sears locations are owned by Macerich and are leased to Sears for a very nominal rent. Of those 7 stores, 4 are closed and 3 remain open and appear to be part of the Sears going concern portfolio including Green Acres, Stonewood and Victor Valley. Group 3 includes 5 Sears stores, 4 of which are owned by Seritage, 1 of which is owned by Sears. Of those 5, 3 are closed and only Inland and Pacific View remain open. The outside lease rejection date is May, so it could continue for a few more months before the leases are rejected.
And while it is uncertain when or if we will gain control, our planning and leasing efforts continue assuming that we will gain control of these boxes. As Scott mentioned, we've assumed a significant rent loss within our 2019 guidance for anchor terminations, the majority of which pertains to Sears. In closing, as we move into 2019, we're looking forward to continued progress on our redevelopment opportunities. We are encouraged by the improved leasing environment and tone, but keeping in mind that we also see retailers that are not going to make through the year without closures, including some big names that have filed bankruptcy within the past 2 weeks. And now I'd like to turn it over to the operator for questions.
Thank We'll take our first question from Jim Sullivan of BTIG. Please go ahead.
Sure. Thank you. Tom, just curious, in the prepared comments, there was a breakout of FFO by quarter, which is helpful, of course. But in terms of the same store NOI guide for the full year, which of course is somewhat disappointing, but we understand why you're providing it. Can you help us understand kind of how that should change over the year?
Back in 2018, of course, it was weaker in the first half, stronger in the second. Within the overall 0.5% to 1% guide, are you assuming a similar trend in 2019?
Well, part of it Jim is the comp period. And as you mentioned, we had softer same center in the 1st two quarters of 2018 stronger in the second half. So that would mean the second half of twenty nineteen would be facing tougher comps. Also it remains to be seen how quickly we will get some of these stores back. So for example, the 3 tenants that filed bankruptcy within the last 2 weeks, Gymboree, Charlotte Russe and Things Remembered, collectively have 90 stores with us.
And we're not sure how many of those stores will close or how much rent concession will Scott, unless you have a different opinion, I'd say that when we look at the Scott, unless you have a different opinion, I'd say that we would probably be fairly consistent through the year in terms of the same center numbers.
Yes. I would agree Tom. The biggest wildcard is the bankruptcies that are in front of us which are likely to be weighted towards latter three quarters given the fact we're in February today, Jim.
Okay. And then a quick follow-up for me. On a sequential basis, the sales per foot number at Biltmore was down significantly. Is that simply the result of the Apple store move to Fashion Square?
Yes, Jim. It's Doug. That's exactly right.
Okay, great. Thank you.
We'll now take our next question from Samir Khanal of Evercore. Please go ahead.
Good afternoon, guys. Scott or Tom, I guess could you just maybe help us a bit understand the range of sort of $350,000,000 to $358,000,000 on FFO? What are some of the biggest swing factors that get you off the midpoint either to the low end or the high end of that range? And also maybe to the extent you could maybe help us think about where consensus was wrong maybe coming into the guidance release here?
Yes, sure, Sameer. I think we mentioned a couple of things in the prepared remarks that could swing either way. The timeliness of when Sears rejects leases is certainly a dictating factor. We have assumed that the lion's share of our Sears portfolio stops paying rents as of February 1. So that could prove to be conservative.
Obviously, there's proceedings going on right now and we'll see how that shakes out. We mentioned the tenant bankruptcies and dependent upon the volume of closures and the timeliness of those proceedings that could certainly influence the range. Like But termination income is always one of those that's hard to peg. We provided guidance that it's estimated at $12,000,000 which is down from the last few years. So that's certainly a factor.
And Sameer, I apologize, what was the second part of your question?
No. I'm just trying to understand maybe where you guys were I'm just trying to help get help and trying to figure out where you are why your guidance was off so much from consensus and why consensus was sort of wrong coming into the quarter. I know you guys had sort of looked at all the models and of the analysts and just trying to see what was it that we may not have picked up
coming into
the guidance?
Yes. Let me touch on a few things. Obviously, we've been clear about our perspective on interest rates being a headwind. So we've provided succinct disclosure in terms of what those figures are. But elsewhere, obviously, same center is surprised relative to where I know you guys modeled.
So that should be factored in. The anchor closures, and we provided our year over year impact at $0.08 of dilution in 2019, that's going to be a factor. We've we obviously sold a few centers in 2018. There's going to be a carry forward dilutive impact. We've commented on that.
That could be an area. And then I'd say lastly, 2019 is a relatively light year in terms of contributions from our redevelopment pipeline. We've got some accretion from projects such as Philly and Kings, but bear in mind that Philadelphia is a late in the year opening and there's going to be some ramp to the openings there through the mid part of 2020. Kings Plaza came online during the middle of 2018, so part of the accretion from that project was felt already. And then cutting the other way, we have projects such as Westside Pavilion, which is obviously winding down Paradise Valley, which we continue to lease on a short term basis to give us maximum control to redevelop that site.
So some of those factors kind of cut the other way. Lastly, bear in mind also, we announced our Nordstrom lease at Country Club Plaza. We that comes with some repositioning of real estate and that is probably something you didn't factor in as well. So I think in total development contributions are probably in the $0.02 range, a $0.01 to $0.02 and you may have factored into your model. So those are a few highlights, but I'll be glad to take it offline and do a reconciliation with you Samir.
Yes. And then just as a follow-up, I mean, we've seen strong increases in sales, but it didn't look like it's translated into percentage rents here. How should we think about that line item for 2019?
Well, there's a very small percentage of tenants pay percentage rents. So you're not going to be able to make a direct correlation. I think we're going to continue to see it trend down somewhat in 2019. Our preference is always to get base rent and fixed CAM charges rather than percentage rent. So typically as leases expire and we renew, we try to increase the base rent.
And with that, you end up getting less percentage rent from any given tenant. I would expect that to continue.
Okay. Thanks guys.
Thank you. Thank you. We'll now take our next question from Craig Schmidt of Bank of America. Please go ahead.
Yes, great. Thank you. I was wondering how much of a drag on the same center I is related to the restructuring of the leases versus just vacant space?
Craig, hi, this is Scott. We mentioned a few factors. There was a significant retailer that we did upon lease expiration had probably upwards of 20 agreements that we ended up restructuring. It's a retailer that typically occupies a bigger footprint. And those were generally not closures.
They were in the most impactful instances downsizings to enable us to reposition that real estate with retailers that we think will perform significantly better. So there's that factor. And then in terms of our estimates for potential fallout from bankruptcies, for instance, there are some closures that we're aware of at this point in time as a result of going out of business sales from the retailers that have already filed. But then on top of that, there's just a general estimate for, what is likely to be a rent restructuring.
So in our guidance, Craig, we've actually factored in an occupancy reduction during the course of 2019 of anywhere between 50 and 100 basis points.
Good. That's helpful. And then just the cadence of store closings in the mall specialty space has been pretty active in the 1st part of the 1st 6 weeks of 2019. Are you expecting that to maintain that or will this start to trail off just given the overall strength of the consumer?
Craig, typically the Q1 is bankruptcy season. They defied that a little bit 2017 where it seemed to go throughout the entire year. That being said, in terms of specialty tenants, 2018 was a relatively light year in terms of bankruptcies and closures. But we typically see most of it in the Q1. These three tenants that I mentioned that have filed in the last 2 weeks, not really a surprise.
It's a surprise when they actually do it, but they both all 3 of them have been on our watch list for a number of years. So the timing and the coincidence that all 3 filed within 2 weeks probably made our view of 2019 a little bit more conservative than it was even a month ago. So I would say that we do expect to see more this year. I expect it to be front end loaded and again that's fairly typical.
Thank you.
Thank you. We'll now take our next question from Todd Thomas of KeyBanc Capital Markets. Please go ahead.
Hi, thanks. Just first question, I guess, Scott, a little clarification. So you mentioned the 3 major chains filing bankruptcy or announcing closures in 2019 to date that are embedded in the guidance plus that assumption that's on top of that for some additional fallout. Can you just break out how much NOI loss is above and beyond what's known today and what that represents in terms of the same center NOI growth forecast?
Yes, sure. Todd, obviously, we don't have succinct visibility into the exact impact for any of these three. But suffice it to say that we're carrying about 100 basis points of dilution in our same center guidance as a result of all this.
Good. Because even though we know who has filed on those 3 that we've been talking about and that's 90 stores, Historically, we would see maybe 50% of those stores close, 25% renegotiate the rent terms and 25% remain unchanged. And at this point, we don't have the visibility into any of those 3 as to what the ultimate outcome is going to be. Okay. But that 100
that includes additional, that includes additional activity in addition to the change that you've discussed. Is that correct?
That's correct, Todd.
Okay. And then just back to Sears. So on the anchor rent loss, if I'm not mistaken, it sounded like you assumed the February 1 liquidation of Sears altogether, but there's you have 3 Macerich owned stores still open, 3 of the Seritage boxes are still open. So how much of the $0.08 per share dilution that's in guidance is related to anchor rents that's already accounted for with stores that are closed? And how much of that is also sort of, I guess, speculative in nature?
Well, so again, the $0.08 assumes what's closed is rejected effectively as of today. If you were to look at the balance of the portfolio, which is probably what you're trying to get at, Todd, if it were to be a full liquidation declared today, there's probably about $0.01 half of remaining exposure from Sears. Most of the stores that are closed today are the higher rent paying stores and with relatively rare exception what remains pays very little rent.
Okay. That's helpful. All right. Thank you.
Thank you.
We'll now take our next question from Jeremy Metz of BMO Capital Markets.
Hey guys. Hey, Tom, in
the fall you had talked about some opportunity to drive additional common area leasing. I think it could potentially deliver upwards of $5,000,000 a year of incremental revenue potential. Just can you give us an update on that opportunity there and how much you're factoring in into the outlook here for 2019?
Yes, Jeremy that continues to be a big focus and push for us to continue to take advantage of the common area and populate it with things that not only generate revenue, but activate the common area. I think we've got maybe $0.02 a share incremental that's in there for that, which is a bit less than the $5,000,000 but hopefully it can outperform and get closer to $5,000,000 rather than the $3,000,000 or so that we projected.
All right. And on the G and A front, any comments on how you feel about overhead costs today? You had a fair amount of savings in 2018. So is there room for further savings there? Is that something that's in the model?
Yes.
I think Scott mentioned that the big positive impact of the reduction in force will be felt in 2019. 2018, we had the reduction in the early in the year, but we also had an offsetting fairly generous severance payment to those individuals. So real benefit will come through in 2019 and that's roughly $12,000,000 of savings. But
does that assume any additional incremental savings? Or is it all just a carryover?
That's primarily it. There's been additional cuts, but not as significant as that. And we'll continue to work on that as well.
Thanks, Tom.
We'll now take our next question from Alexander Goldfarb of Sandler O'Neill. Please go ahead.
Hey, good morning out there. Tom, just two questions. So on the first question, if I hear you guys correctly, because you guys had previously disclosed, when there were all the estimate revisions, about $0.04 negative impact from Sears. So it sounds like there's now an additional $0.04 to make a total 0.08 The bankruptcies, if you said it's 100 basis points, that sounds like another $0.06 The shrinking anchor, I'm guessing that's Forever 21, but whoever that anchor is, it sounds like that's an undisclosed amount. So right now, I'm at $0.10 of the $0.20 delta roughly between The Street and where your guidance midpoint is.
So how much else is this the shrinking anchor, how much is that? And then what are the other missing parts that you guys haven't already disclosed on previously that make up sort of that $0.20 delta from where the street is to where the midpoint of your guidance is?
Well, Alex, one aspect of that was the occupancy reduction we expect to see. I don't think that had been discussed with you in terms of your model and others. Part of that is influenced by the heavy bankruptcy activity we've seen already in the 1st 6 weeks of the year. So that's certainly an aspect of it.
Okay. And then also just add
I was just going to say I'd also add what I mentioned to Sameer, which is take a look at your underwrite for development accretion in 2019. We expect that to be probably less than what you've modeled, Alexander.
Okay. And then the $0.05 impact from Heitman that's not in guidance, is that something that's going to run through FFO? So the guidance range should be effectively $0.05 lower or what's the 5 what's that footnote about?
Yes, sure. The footnote is a confusing accounting pronouncement that came in into effect January 1, 2018. Our interest expense, Alexander, is really just interest from debt. But I'd just point out in the footnote that if you're modeling those 2 assets, which are consolidated assets at 100%, you have to factor in a deduction for our partners 50% share of those assets, which is reflected within interest expense. So it's really just meant to be a clarifying edit for you, clarifying footnote to make sure you're capturing a deduction for our partners' half share of those two assets.
Okay. So it's not that FFO guidance is actually $0.05 lower, that's just purely accounting.
Yes, that's correct. Purely accounting and it's really meant to be a modeling, footnote for you.
Okay. And then if I can, on the Sears, Tom, how much capital have you do you expect that these Sears will take? And sort of what's your split up between backfilling as is versus ripping down redeveloping?
Right now, we've got a $250,000,000 to $300,000,000 kind of placeholder, Alex, in the development pipeline. Again, right now, we're not entirely sure which ones we're going to get back. Seritage, as we said, 6 of the 9 are closed. Those would be likely candidates. We've got some pretty good prospects there.
And I would say as we look at it today, about half of those Sears boxes that we would get back would be a redemizing exercise and half would be situations where we would knock the square footage down and repurpose that square footage elsewhere on the various sites, including some mixed use health clubs, entertainment, potentially some office as well, hotel. But we think right now as we look at it and guess which ones we're going to get back, it's going to be about fifty-fifty.
Okay. Thank you.
Thank you.
We'll now take our next question from Christy McElroy of Citi. Please go ahead.
Hi, good morning to you guys. Just following up on the $0.08 of impact from anchor terminations, is all of that assumed to be driven by Sears or are there any other anchor closures in there? And how much of that presumably the Sears boxes, once presumably the Sears boxes, once they're rejected, they go into the redevelopment pipeline.
Yes. Hi, Christy. This is Scott. Yes, you're correct on the latter comments. The anticipated reduction of rents comes out of the same center pool.
The lion share of that $0.08 does relate to Sears. We had very little exposure for instance to Bon Ton and their bankruptcy which occurred in roughly late summer of 2018. But there's a little bit of carry forward impact from that. But again, the majority relates to Sears. Lastly, as it relates to co tenancy, as we've mentioned to you in the past, co tenancy was relatively minor.
To the extent there's any impacts, those have been reflected in our numbers. Of course, those are there's a time delay to those. So it's relatively minimal to 2019, but that would be embedded within our same center numbers and it's already been factored in.
Okay, got you. So the $0.08 is largely outside of the same store?
Correct.
Okay. And then, just following up on Alex's question, just with the assumed $30,000,000 of capitalized interest, with the Seritage JV Sears boxes now in the shadow pipeline, what does your cap interest forecast assume just with regard to those Sears boxes in terms of the timing of rejection and when you start capitalizing the cost basis of the JV? Because I think that cost basis, you immediately would start capitalizing the 100 and $50,000,000 as soon as those go into the pipeline?
Yes, sure, Christy. So just in terms of rough numbers, it is 100 and $50,000,000 in terms of our basis. 2 thirds of those stores have closed, so roughly 2 thirds of that basis, we start capitalizing interest effective February 1. So when we assume the loss of rent, we'll assume the capitalization of interest.
Okay. So it's based on the closure, not on the lease rejection?
No, it'd be based on lease rejection. But in the guidance, we'd assume that everything was going to be rejected as of February 1. So it's somewhat conservative in that regard.
Got it. Got it. Okay. Thank you.
We'll now take our next question from Brian Hawthorne of RBC Capital Markets.
Hi. I just want to talk about some of the leasing conversations you're having. How are are you guys still able to get about 2% -ish contractual rent increases?
It's Doug. Yes, yes. It's 2% between 2% and 3%.
You get that pretty consistently? Or is it kind of tough to get?
No, it's pretty consistent.
Okay. And then my other one is just on tenant retention, how does that look at lease expiration? Has that changed at all?
It's Doug again. Not really. The tenants that are suffering, the ones that are closing stores, obviously, we're not trying to retain them. And given our portfolio that's 95%, 96% leased, we're proactively going out and trying to replace those non performers. So I would say that retention is in our hands and we're doing it depending on how we want to merchandise the center and with whom we want to merchandise the center with.
Okay. I mean, I guess, so when you kind of talk about that, is that tenant retention kind of being stable, I guess, then is that saying that on a square foot basis, it's stable or is it on a number of stores basis? I guess what I'm getting at is, are your current tenants taking like downsizing? Okay.
Depending. Some of the tenants that have a big footprint have found that they can do the same amount of business or more business in a smaller footprint. So in some instances, yes, they are. But in other instances, those that are just sort of blowing it out in sales realize that they need to be a little bit bigger. So it really does depend on the retailer.
But I would say right now, it's more popular to be small than it is to be larger.
Okay. Thanks for taking my questions.
Thank you. We'll now take our next question from Linda Tsai of Barclays. Please go ahead.
Hi. Regarding the big box rent reductions, how was the new rent decided? Was it tied to a new occupancy cost ratio? And then in terms of the lease structure, was the term shortened or did they go to percentage rents?
Yes, Linda, hi, this is Scott. So we're talking about new stores, new leases. When you look at the entire package, there was a select few where the retailer just had a big footprint and needed to shrink. So we effectively gained control with the ability to re tenant that space with much more productive merchants. So that's kind of the dynamic.
It's paint with a broad brush, but it was very much there were wins as well as concessions.
And just to be clear, this was for 1 retailer or different retailers?
1 retailer.
1 retailer. And then I think earlier H and M said they were going to close 160 stores in this year. Do you know if any of these will be in your portfolio?
None that we're aware of.
Correct. Thanks.
We'll now take our next question from Jeff Donnelly of Wells Fargo. Please go ahead.
Just a first question around the new guidance, I think it implies extremely tight FAD coverage of the current dividend with little incremental capacity to undertake an increased load of I think the redevelopment that you're going to be facing. I was curious what thought the Board had given to reducing the dividend to retain more cash, particularly in the event you face an extreme capital need in the future. I guess in the event that were to occur, whether it's a redevelopment debt reduction, how do you guys think about capital sources to fund any future obligations like that?
Jeff, I think Scott went through a lot of liquidity plans we have as a result of the refinancing as a result of San Tan Village in Chicago and Kings Plaza. We should see $400,000,000 of excess proceeds, which will be temporarily used to pay down our line of credit and then used for the redevelopments. The Board addressed the dividend in the last quarter and we increased it very modestly $0.01 So we've just recently addressed that. And I think our liquidity is more than enough to get us through the redevelopment pipeline. And also as you look at this year, that same center growth rate of 0.5 to 1 is not something we expect to be the new norm.
If you look over the past 10 years, we've averaged same center NOI growth of 3.2%. So to me this is a low point and we would expect same center NOI and cash flow to grow at a much more robust rate as we move into 2020 beyond. Again, some of these bankruptcies that are causing the tightness in the same center are tenants that we've had on our watch list for 3 or 4 years. So in some respects the fact that they're going in their respective bankruptcies is it's painful short term, but long term it's healthy for the industry and for our portfolio.
Understood. And maybe just one last question is, I'm just curious how your own vision for Macerich has evolved as you've moved forward towards taking over leadership there. Has that maybe changed at all over the last 6 months and maybe a sort of a second part to it. Your predecessor retired after a 25 year stint at Macerich and is mid-60s, you're not too far from that same achievement. Sorry to out you.
I'm just curious how do you or the Board think about succession planning? I know you only took over the helm a month ago, but I'm just curious what your thoughts are.
Well, a couple of things on that, Jeff. I've been here for a while. So we've all been part of this Macerich team, Ed, myself, Scott and Doug for quite a while. So there's not going to be dramatic changes, maybe a change in leadership style. And I will admittedly say I'm not quite as committed to some of the things that Art was.
But directionally, I think things are very much the same. In terms of succession in age, I would venture to say I'm probably fitter than most people 20 years younger than me. And if anybody wants to challenge that,
I'm happy to give it
a go, including you. So I don't think the board is too worried about my current age or physical condition. And we just went through succession. So I'm not sure that's at the top of their list right now, but that's more a question for them.
Okay. I'll nominate someone to take you on. Thanks guys.
Not me.
And we'll take our next question from Haendel St. Juste of Mizuho. Please go ahead.
Hey there. Curious on the bottom 20% of your portfolio, thoughts on that piece today. Would you be willing to sell perhaps be a little less price sensitive? And then I'm curious as you forecasted that the NOI 50 bps to 100 bps, what is the differential between the upper portion of your portfolio versus the lower portion?
Well that the lower assets really represent a pretty small percentage of our NOI. I'd say 5% or so. So they're not real big influencers. And there's not a ready market to just go out into the market and sell those opportunistically at a strong cap rate. From our view, they're not hurting our portfolio.
And to go out there and try to sell in an unwilling market doesn't make any sense to us. So as Scott said, we've got no dispositions in our guidance as it relates to those lower tier assets. So again, we whittled that portfolio down significantly over the course of the period from 2012 into 2017. We sold 25 of those centers. So we reduced that number from about 15%, 20% of our portfolio to about 5%.
So we're content with those right now. And they did not have a material adverse impact on that same center growth number.
Okay. And then I guess the question on the rent reductions. Do you think the majority of the rent reductions for your problem tenants occur this year? Or do you think we'll have a few more years of these reductions and should expect the similar impact next year?
Well, it's pretty hard to predict. As I said, 2018 was relatively light other than the department stores. This year has been pretty active for the 1st 6 weeks of the month. That being said, our tenant watch list is shrinking with the passage of time and there's fewer tenants on there that we are concerned with. As I said, the 3 that just recently filed have been on our watch list for the past 3 or 4 years.
So I think the 2019 impact is not something I would necessarily project to see again in 2020 or 2021.
Okay. That's helpful. Thanks. And I'm going to try to sneak in one last one. Based on what you just mentioned in a prior response, I'm curious perhaps if you can elaborate on a few of the items that you're thinking versus your predecessor is a bit different about it?
I'm not sure I know anybody that's as passionate about digitally native vertically integrated brands as art. So I will probably spend less time on that than he did. And conversely, I may spend more time working with our redevelopment folks on some of the Sears boxes and what we can do there. Plus we're closer to having those in hand or under control than when Art was at the helm. But look, we worked together for 24 years as did Ed.
So there's not going to be any radical change in direction as a result of the change at CEO.
Thanks, Tom.
We'll now take our next question from DJ Busch of Green Street Advisors. Please go ahead.
Yes, thanks. I just want to follow-up on Christy's question. Scott, I want to make sure I heard you correctly. So when you think when we think about the $0.08 reduction due to the anchor move outs and I think you said that those would come out of the same store pool. So how does that work exactly?
Does that mean as these anchors close, the entire center at which those anchors are located are going to come out of the same center pool and then be moved to the bottom or moved into the redevelopment bucket?
No, D. J. It is, it's just the store itself. Think of Seritage as a kind of a siloed collection of stores granted they're attached to Macerich malls, but we're just pulling out the store volume in terms of the rent contribution, not the entire mall.
And is it just for the Seritage stores? Or is that kind of the practice for other anchor vacancies as well?
It's, look, what we're dealing with right now is a very nominal dilution from a set of approximately 4 stores, I think, from Bon Ton. Very nominal, probably not even worth the words I just spilled out here. It's really Sears and we're pulling it out of same center.
Okay. And then maybe a follow-up on Jeff's question. Just you guys addressed the liquidity. You have FOC behind you. You have the other 3.
That sounds like they're kind of in process. So from a liquidity standpoint, I understand where you guys are going. But just thinking about where leverage is today, just under 9 times, probably moving higher over the next year. When do you see that inflection point, Scott? When should we expect that leverage to come back down, probably the levels we saw just even going back maybe 2 years?
D. J, this is Tom. I'll have Scott check with you. I think you may be missing a couple of pieces in terms of net debt to EBITDA because we're closer to mid-eighty percent s and we see that moving around a little bit either both above and below that based on the timing of the redevelopments and when they come online. And it will gradually start to come down.
That being said, we could also at some point in the future do a joint venture and generate some equity and delever with that. So other than that one metric, we're pretty comfortable with the rest of our balance sheet metrics both maturity schedule, interest coverage ratio, which is north of 3 times, which is pretty healthy. We've reduced the amount of floating rate debt we've got. So there's a variety of things. If we do nothing, it'll stay between 8% and 9%, but it's also possible we could generate some liquidity through doing joint ventures and use that to pay down debt as well.
Okay. Very good. I'll follow-up with Scott. Thanks, Tom.
Thanks.
I think we've got time for one more operator.
We'll take our final question from Tayo Okusanya of Jefferies. Please go ahead.
Yes. Just going back to the question of your watch list,
could you just talk to us
a little bit about what else is still kind of on the list? And the reason I asked is that in the context of your guidance, the additional reserves or additional conservatism you're having your numbers around additional store closures or rent loss apart from the retailers that have already kind of announced bankruptcies?
Yes. Tayo, we always maintain a watch list depending on a variety of things, tenant sales, occupancy costs as a percentage of sales, the financial health of the tenant things like that. And if you look at our watch list excluding the tenants that just filed and I don't want I'm not going to give specific names of tenants, but if we looked at all these collectively, I'd say there's probably 300 stores in total that are on that watch list. And that's not an unusual number. I think over the past few years, we've had anywhere from 400 to 600 stores on the watch list.
So it's actually down a bit. And the level that it's at today is not unusual. As I said, 90 stores were associated with the 3 tenants who just filed bankruptcy. So that's recently been reduced from about 400 to 300.
Could you talk a little bit about the retail categories that some of those 300 stores represent?
It's pretty much across the board. I mean, you've got apparel in there, you've got jewelry in there, you get some that fall in the general category. But I think the bigger categories would be apparel and jewelry.
Okay. And then just one more for me, if you don't mind. The hotel development, the Seasons Hotel, you guys don't have a stake in that, but I think ground leasing it from Macerich or what's exactly is there any kind of financial interest in that project?
Yes, we're doing yes, we're ground leasing the land to Caesars for that hotel. So we'll get How long
is the name?
It's long term. I can't remember off the top of my head, but it's 20 years or more.
Got it.
All right. Thank you.
Thank you.
So thank you for joining us today. We're excited about the opportunities in front of us and we look forward to working with you throughout the year.
This concludes today's call. Thank you for your participation. You may now disconnect.