Good day, and welcome to the Macerich Third Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Gene Wood, Vice President of Investor Relations. Please go ahead.
Thank you, everyone, for joining us today on our Q3 20 18 earnings call. During the course of this call, management may make certain statements that may be deemed forward looking within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially due to a variety of risks, uncertainties and other factors. We refer you to today's press release and our SEC filings for a detailed discussion of forward looking statements. Reconciliations of non GAAP financial measures to the most directly comparable GAAP measures are included in the earnings release and supplemental filed on Form 8 ks with the SEC, which are posted in the Investors section of the company's website at macerich.com.
Joining us today are Tom O'Hearn, Senior Executive Vice President and Chief Financial Officer Doug Haley, Executive Vice President, Leasing and Scott Kingsmore, Senior Vice President, Finance. With that, I would like to turn the call over to Tom.
Thanks, Gene. The 3rd quarter reflected generally good operating results as evidenced by the strength of most of our portfolio's key metrics, including an improvement in same center net operating income growth. As we mentioned several times on our last calls, the bankruptcies and early terminations in 2017 tempered our growth in the first half of twenty eighteen as we work through leasing up that space. Most of that space has been re leased by September 30 as is evidenced by our 95 rate. We continue to see an improving leasing environment with a strong retailer sales, far fewer bankruptcies and a much more positive tone from the retailer community.
Looking at results of operations for the quarter, FFO was $0.99 per share, which compared favorably to our guidance of $0.97 and exceeded the $0.96 reported in the Q3 of last year. Quarter end occupancy was 95.1 percent, up 80 basis points from last quarter and up 80 basis points from September 30, 2017. Same center net operating income, including lease termination revenue, was up 3.7% for the quarter. Excluding lease termination revenue, same center was up 3.1%. As we indicated on the last earnings call, we expected to see this acceleration in same center in the second half of twenty eighteen.
We also expect the 4th quarter to exceed 3%. The property gross operating margin improved by 80 basis points to 69.4%, up from 68.6% last year at the Q3. Now looking at the Sears bankruptcy and its impact on us, we have a total of 21 Sears stores. That is significantly less than the 40 Sears locations we had in 2012. As a result of our disposition program over the past 6 years, we have reduced our Sears exposure by nearly 50%.
The average building size is 150,000 square feet on a parcel size that ranges from 10 to 20 acres. The Sears bankruptcy was long expected and represents a great opportunity for us to improve our high quality portfolio, both in terms of tenant quality, sales productivity, traffic and densification. The redevelopment we have recently completed at Kings Plaza is a great example of that. The Sears boxes can be categorized into 3 different ownership groups. The first is 9 of the Sears stores are owned fifty-fifty in a joint venture with Seritage.
7 of those 9 are on the closure list. The other 2, Danbury and Freehold, have already been 50% converted by virtue of putting Primark in those locations. These stores are at some of our best malls. That group has an average sales per foot of $7.80 per square foot. We have plans for all of these locations with a range of opportunities, including demolishing the box and repurposing the square footage with more productive uses, including mixed use and densification.
In certain locations, we will be redomizing the existing box and putting in more productive retail uses that will generate significantly more rent, sales and traffic than Sears provided. The second group of stores, we have 7 locations that are owned by us and leased to Sears for a very nominal rent. 1 of those locations is already closed and the others are not on the closure list and it is not clear at this time what Sears intentions are with those stores. These locations, if closed, will allow us the opportunity to replace a non productive department store box with a more productive traffic generating use. The last group are the stores the 5 stores that are not owned by us, 4 of which are owned by Seritage, 1 is owned by Sears.
1 of the locations is closed and 2 of the Seritage owned stores are on the closure list. A number of you have asked about co tenancy issues if Sears closes all of their stores. At 11 of our centers, we have 0 co occupancy exposure. At the other 10, the amount is immaterial, in total about a penny a share if all those locations close. Of the 16 locations that we have ownership positions in, we would estimate our pro rata share of the capital requirements to redevelop those to be in the range of $250,000,000 to $300,000,000 spent over the course of the next 3 to 4 years.
Shifting now to the redevelopment development pipeline. At Kings Plaza in Brooklyn during the Q3, we had the grand opening of the $100,000,000 redevelopment. This is a case where we recaptured the Sears box that was doing under $30,000,000 in sales. The project significantly improved the overall tenant mix at the center with the addition of Primark, JCPenney, Burlington and Zara, all of which opened in the Q3. Consumer traffic is up significantly and the overall shopper experience has improved dramatically.
These new retailers in total are expected to do over $100,000,000 in annual sales. It is also very significant physical transformation, and you can see the before and after photos on the cover of our supplement. At Fashion District Philadelphia, construction continues on a 4 level retail hub spanning over 800,000 square feet in the heart of downtown Philadelphia. We have signed leases or have commitments for tenants for over 87% of the leasable area. Noteworthy commitments include Century 21, Burlington, H and M, Forever 21, Columbia Sportswear, AMC Theaters, City Winery in Ulta.
We have a number of other exciting tenants we will be announcing in the near term. The grand opening is planned for September 2019. At Scottsdale Fashion Square, we're under construction on an 80,000 square foot exterior expansion, including restaurants and high end fitness club. The expansion is 100% leased and includes Nobu and Ocean 44 restaurants amongst others. In addition, we have opened a new Apple store and are adding co working space in what had been the Barney's store.
Apple held their grand opening on September 29 and the construction of the industrious co working space for the balance of the former Barney's box is in process with an anticipated Q1 of 2019 opening. We expect sales productivity for this box to be significantly higher than what we were seeing from the Barneys location. This is another prime example of an adaptive reuse of an underperforming anchor store with vastly better traffic generating uses. In September, we were pleased to announce that we formed a fifty-fifty joint venture with Simon Property Group to create Los Angeles Premium Outlets. This is a tremendous site located on heavily traveled 405 Freeway in Los Angeles.
We will be co developing and jointly leasing this project designed to open its first phase with 400,000 square feet followed by an additional 166,000 square feet. The city currently is underway with their site work and we will commence our construction once they finish that. The planned opening is fall of 2021. With that, I'll turn it over to Scott to discuss the balance sheet.
Thank you, Tom. The balance sheet continues to be in good shape. At quarter end, the balance sheet metrics were as follows. Debt to market cap was 48 percent. Average debt maturity is 5.3 years and our maturities are very well laddered by year into the future.
Interest coverage is 3.2x. Net debt to EBITDA on a forward basis is 8.2x. Remaining 2018 maturities are only $9,000,000 at the company's share. At September 30, 2018, the weighted average interest rate was up 25 basis points to 3.89% as compared to September 30, 2017. This is a consistent trend that we expect to continue into 2019.
In terms of our near term financing plans, here are a few highlights. In Q3, we reduced our floating rate debt from 21% to 16% of our total debt by swapping $400,000,000 of our floating rate exposure to fixed. This 3 year swap at 2.85 percent effectively locked $400,000,000 of our revolving line of credit at a fixed rate of 4.3 percent for 3 years through September 30, 2021, as well to create additional liquidity and to further reduce our floating rate debt exposure, we have planned a financing of Fashionality of Chicago, which is currently encumbered by a $200,000,000 floating rate loan. We have arranged to refinance the property with a $300,000,000 12 year fixed rate loan with a major life insurance company. The refinance is expected to close in January 2019 and it will further reduce our flooding rate debt to approximately 12% of total debt.
In addition, looking forward into 2019, we have 3 highly productive centers in Kings Plaza, Chandler Fashion Center and San Tan Village, each of which are under leveraged today and have maturities in 2019. We would expect to see about $350,000,000 of excess proceeds upon the refinancing of these three assets in mid through late 2019. Collectively, with Fashionality of Chicago, we expect to raise approximately $450,000,000 of capital in 2019 with these 4 refinancing transactions. Now on to 2018 guidance. As mentioned in our earnings release last night, we are narrowing the range of our issued earnings guidance to reflect our current expectation of results for the remainder of 2018.
The narrowed range for FFO per share, excluding costs related to shareholder activism that were recognized in the Q2 of this year, is now $3.82 per share to $3.87 per share. The change to FFO guidance results primarily from the reduction in the same center net operating income growth assumption for the full year from 1.5% to 2% down to 1.2% to 1.7%. This assumes a 4th quarter range of 3% to 3.5% of same center This full year guidance also equates to a same center net operating income range of 2.2% percent to 2.7 percent excluding lease termination income. We believe that this higher range excluding lease term income is noteworthy and is indicative of a less disrupted and healthier occupancy environment. You will further note that this range excluding lease term income differs only modestly from the prior guidance given during the prior quarter because most of the change to same center was frankly caused by nearly a penny decline in lease term income.
Our assumption for bad debt expense also modestly increased by $1,000,000 as well. Both assumptions are simply a function of having better visibility now to these forward looking assumptions than we had 3 months ago. In gross dollars though, dollars 2,500,000 is not a significant change to our company. In addition, you will note that our we increased our interest expense guidance by approximately $1,000,000 primarily to account for the swap transaction that I mentioned a few minutes ago. More details of the guidance assumptions are included in the company's Form 8 ks supplemental financial information.
And with that, I will turn it over to Doug to discuss the leasing environment.
Thanks, Scott. In the 3rd quarter, sales remained strong and leasing velocity continued. Portfolio sales ended the Q3 at $707 per square foot, which represented a 7.3% increase on a year over year basis. Economic sales per square foot, which are weighted based on NOI were $8.19 per square foot and that's up from $7.70 per square foot a year ago. Occupancy was at 95.1% and this represented an 80 basis point increase on a year over year basis and from the Q2 2018.
Trailing 12 month leasing spreads were 10.8%. And as we mentioned on our last earnings call, in the Q2, we had a package of 11 deals with 1 particular tenant averaging 4,300 Square Feet. Excluding those leases, spreads would have been closer to 14%. Average rent for the portfolio was $59.09 that's up 4% from $56.88 as of September 30, 2017. Leasing volumes were strong.
During the Q3, a total of 856,000 square feet of leases were signed, bringing the total activity during the 1st 9 months to over 2,000,000 square feet. The average term for the leases signed in the 3rd quarter was 5 point 4 years, that's similar to the Q2. 3 new flagship leases were executed this quarter: Lululemon at Scottsdale Fashion Square, Anthropologie at Chandler Fashion and H and M at Danbury Fair. Tom mentioned the opening of the new Apple flagship at Scottsdale Fashion Square, which is nothing short of incredible. It's one of the nicest stories I've ever seen attached to a super regional shopping center with fabulous inside and outside exposure.
It really is a must see. Understanding the need to differentiate, stay cutting edge and to accommodate the demand of our shoppers, we continue to elevate our food, entertainment and experiential offerings. As Tom mentioned in the Q3, we signed leases with City Winery at Fashion District Philadelphia and Nobu at Scottsdale Fashion Square. Other recently signed leases in these categories include The Void at Tysons Corner, Round 1 Bowling at Valley River, Crayola at Chandler Fashion Center and Cheesecake Factory at South Plains. We're already one of Shake Shack's largest landlords and we continue to expand our relationship and are in advanced discussions on several additional locations throughout our portfolio.
Other retailers in these categories include 2 Bit Circus, Pinstripes, Dave and Buster's, Putt Shack out of London and Rec Room out of Canada, all of whom we are actively working with. Theaters are also expanding and we look forward to furthering our business with some of the industry leaders such as Cinemark, Cinebistro, Bowtie and others. Lastly, in the experiential category, the Catons Children's Museum is well under construction on the 3rd level of Santa Monica Place and will open in the Q1 of 2019. This is one of the most exciting deals we've completed in this category this year. The museum will be the only one of its kind in all of Los Angeles and is expected to attract over 400,000 visitors per year.
This will unquestionably have significant positive effect on all tenants at Santa Monica Place and in particular, our dining options on the 3rd level. We remain active with the digitally native brands executing multiple leases, including the first ever bricks and mortar store with the RAVOS at Tysons Corner. We also signed Alex and Ani at Cerritos, Beta at Scottsdale Fashion Square, Bonobos at 29th Street and the Village of Corte Madera, Rudy at 29th Street, Stance at Washington Square and Madison Reed at Broadway Plaza. Additionally, we will be opening up 4 untuck it micro stores in the common areas at Vintage, Fresno, Freehold and Los Cerritos for holiday this year. Excluding Sears, there were 5 bankruptcies totaling 16 stores in the Q3.
Of the 5 bankruptcies, only 4 stores closed. The bankruptcies were comprised of smaller brands with only Brookstone actually liquidating. Year to date non anchor closures total only 16 stores and that compares to 92 closures in 2017. This is the slowest closure pace we've seen since 2012. Sears filed for bankruptcy, as Tom mentioned, on October 15, 2018, And this bankruptcy has long been anticipated and we've been actively working on redevelopment plans for all of our Sears locations.
So in conclusion, our leasing metrics remain solid and the level of bankruptcies is significantly lower. We continue to focus not only on our traditional retailers, but also those in the entertainment, experiential and digital sectors. And most importantly, in terms of the leasing environment, we believe the tone and the sentiment are definitely showing signs of improvement. And with that, we'll open it up to Q and A.
Thank We will take our next question from Jim Sullivan of BTIG. Please go ahead. Your line is open.
Okay. Thank you. Tom, I think when you were in your prepared comments, you talked about the capital requirement of re tenanting vacated anchors and you gave a number of $250,000,000 to $300,000,000 And I was unclear exactly how many boxes that related to number 1 and kind of second part of that question. Can you tell us of those boxes, how many are simply going to be a straightforward replacement of 1 anchor with another anchor as opposed to kind of a re concepting of the space into smaller stores that might generate perhaps significantly higher income?
Jim, it's going to be a combination of things. That number really relates to the top two categories I mentioned first, the 9 locations we have with Seritage and then also including the 7 locations that we own. The exact details to be determined, that's just an estimate. Some will merely be a redemizing of the existing box. But some of our best opportunities will be in those some of those Seritage properties where we've got the ability to demolish the building and repurpose that square footage elsewhere likely in mixed use and things other than retail.
We will take our next question.
Did you have a follow-up to that, Jim?
Sorry.
Tom,
am I on?
Yes, Jim. Yes.
Okay. So the second part of the question would be and it may be too early to give us a number, but for that incremental investment the $250,000,000 to $300,000,000 is there a range of yield that you would anticipate as you underwrite these?
Too early to put that out there, Jim. I mean typically you've seen our yields range from 6% to 10%, but it's too early to be specific on this package.
Okay, very good. Thank you.
Thank you.
We will take our next question from Craig Schmidt of Bank of America. Please go ahead. Your line is open.
Hi. I just wanted to talk about the strong sales growth. Is that possible to get a comparable number in Q4 or is it tougher comps that may lower that? And then just given this strong sales performance, do you think we'll see a widening of our leasing spreads?
Craig, we typically don't try to predict where sales are going to be. It's obviously been strong the last 4 or 5 quarters and there's no reason to think that won't be. In fact, it was interesting to note that last week Moody's boosted their retail outlook for to positive for the first time in 3 years, and they are speculating that it will be a strong holiday season. So who knows, we're not going to speculate on that. In terms of the leasing spreads, and Doug, you can elaborate further.
I think we had somewhat of a negative impact as a result of signing 11 renewal deals on some fairly large spaces that weighed on that stat. So I think it is exclusive of Q2. Yes. Exclusive of Q2.
Yes. And I think, Tom, I mentioned if it weren't for one particular tenant that we signed 11 deals with in the Q2, the spreads would have been closer to 14%.
Okay, thanks.
Thanks, Greg. We will now take our next question from Jerry Meimetz from BMO Capital Markets. Please go ahead. Your line is open.
Hey, guys.
So Tom, you mentioned the potential additional Sears spend here. You have Philly and Scottsdale ongoing, a bit of capital you'll still contribute at Westside. You have the new venture with Simon. You guys did lay out some expectations for proceeds that you expect to get out of Kings, Chandler, Chicago and a few others. But as we think about your sources and uses and your leverage today at over 8 times, how should we think about that trending?
And what sort of target range do you want to get back down to? And what's the timing expectations to do so?
Right. So, Jeremy, the projects you mentioned really stretch out all the way to 2021. And even when it includes Sears in the mix, we're probably talking about $200,000,000 to $250,000,000 spend per year. We will also have the benefit I think when you refer to the balance sheet, you're probably talking about the single metric of debt to EBITDA. And we'll also have the benefit of Kings Plaza EBITDA in our numbers for full year next year.
Philly will start to come online next year as well Scottsdale Fashion Square. So we'll have some benefit of the additional EBITDA coming in today on those projects. We've just got the related debt without any EBITDA. So we'll get a benefit there that will move actually move it down a little bit. But if you take a look at an average compounded annual growth rate for us on same center sales and you move that forward from today into 2021, and you look at these projects and you look at the timing of when the EBITDA from the construction projects rolls in, we should actually see a slight decline as a result of all these projects and the natural growth we would expect out of our portfolio going forward.
So if it's at a forward rate of 8.3 debt to EBITDA today, I could see that bouncing around a little bit, but eventually moving below 8.
And you've been more active on selling some non core assets. Is that at all part of the plan as you look forward here?
We've gone through a period of time since 2012 when we've sold a lot of non core assets. Recently, we announced that we'd sold a couple of power centers, which were carryovers from the Westcore acquisition in 2012. But that being said, we don't have any dispositions in our guidance. I think we're ready to focus on the portfolio we have in driving same center NOI growth and EBITDA growth. So I wouldn't expect too many dispositions from us near future.
Thanks, Tom.
Thank you.
We will now take our next question, Christy McElroy from Citi. Please go ahead. Your line is open.
Hi, guys. Just with regard to the 7 Sears stores on the closure list that you have in the started JV, were these negotiated to close pre bankruptcy? So did you have to pay anything to get the leases back and gain control of the space? Or were these just naturally rejected?
Well, Christy, they've been put on a closure list. There hasn't been a formal rejection yet. So that's it's in the hands of the bankruptcy court. It seems like that's a natural place for it to end up, but it's to be determined at this point.
Okay, got you. So that you in terms of being rejected, in terms of any consideration that you might have to pay to gain control of the leasehold, that's still up in the air?
Typically, there wouldn't be any, but it is up in the air.
Okay. And then just in terms of the LA outlet project, is your contribution of land part of the pro rata cost consideration in the fifty-fifty JV? And can you discuss sort of the split of responsibilities of Simon as you build out that project?
Yes, Christy. This is kind of a unique site. It had been a former landfill. And so there's some environmental issues there that are going to be monitored. The city is going to continue to own the land and what we have along with our partner are air rights to build above that.
So the city is going through doing what they have to do on the site work and on-site and off-site work and remediation. And then once they've done that, they'll deliver that to us and we have air rights about that. And then in terms of the responsibilities, I mean, we're just going to we're going to co lease it, we're going to co develop it. I think they're going to do the marketing. We'll do the day to day property management.
So it really is pretty close to a fifty-fifty split on responsibilities as well.
Thank you.
Thanks. We will now take our next question from Todd Thomas of KeyBanc Capital Markets. Please go ahead. Your line is open.
Hi, thanks. Just question for Doug on leasing. Given the improvements that we've seen in retail here more recently, is it safe to assume that based on current conditions, we shouldn't see any additional relief or package lease deals like you had in the 2nd quarter or tenants still coming to with those requests?
Todd, I think that's more property specific. But in general, I would say that given the climate and given what's happened in the past, those should be fewer than we've seen in the past going forward.
Okay.
And question looking at Kierland Commons that took a pretty big step up in sales. I know there's been some re tenanting there, but
just curious if you could
speak to what drove the big increase this quarter?
Yes, this is Scott. So we've recently added a Tesla to the project and so that's causing some increases. Kierland has always operated a very healthy growth clip independent of that, but I think Tesla is probably one of the
catalysts for that. Got it. And just last question on the lease accounting changes that will be implemented in January. I think there were some debate over how they would be sort of allocated or how they would hit the P and L. Is there any additional clarity around that?
Yes. Todd, subsequent to last quarter's call, we had a lot of conversations with a variety of people. And I think what seems to be the most desired thing to have us do is to put it in there with G and A as a separate line item, so people can keep track of it separately and not include it with property level expenses.
Okay. So the majority of it, we should expect to hit G and A?
Well, it will have we'll put it below G and A on the income statement, and we'll just label it leasing expenses.
Okay, got it. Thank you.
We'll now take our next question from Alexander Goldfarb of Sandler O'Neill. Please go ahead. Your line is open.
Sure. Good morning. Hey, Tom, how are you? So it sounds like we got a question and a follow-up is what it sounds like. So the first question is, I realize it's getting towards year end and probably more thoughts around 2019.
But just going to the same store guidance reduction this year, you guys reduced the lease term income that you expected on your Q2 call. And the lease term income that you're expecting now is pretty much the same that you revised down to last time. So what is the driver of the change in the NOI guidance for this year ex lease term if last quarter you forecast $15,000,000 for the year, this quarter you're forecasting $14,000,000 I mean, does $1,000,000 make that much of a difference, a 50 basis point difference? Or is there something else going on in the reduction?
Yes, Alexander, this is Scott. I'll go ahead and take that one. So as I mentioned in my opening remarks, the gross dollar change as a result of the change in the same center is really not that material. It's $2,500,000 It's comprised of nearly a penny of termination income decline. It's a reassessment of where we stand today relative to our bad debt exposure and we have bumped that up $1,000,000 So it's about $2,500,000 That simply drives the same center metric, including termination fees down 30 basis points.
So it doesn't take a lot of movement in terms of basis points to drive a very small dollar result. So just keep it in mind, it's not that consequential, but
And I think what's really relevant here is the acceleration of same center. I mean, people are getting hung up because of what effectively is a 5 basis point shift in same center growth excluding term fees. Term fees are down. That's always a guess. We made term fees of $21,000,000 in 'sixteen, dollars 22,000,000 in 'seventeen.
I think that's what we use as our guesstimate for 'eighteen and we've trimmed that over the course of the year. But we have seen the acceleration in same center in the Q3. We've told you we think it's going to be north of 3% in the 4th quarter. And if you exclude lease term fees, it's even higher than that. So that's the real story there.
That minor reduction is pretty immaterial.
Okay. And then the second one is, on the new Simon JV for LA Premium Outlets, does this mean a potential revisitation of Candlestick and perhaps you and Simon would JV on Candlestick Premium?
I mean, certainly, we are open to doing other joint ventures with them. We've been joint venture partners going back years ago when we did the IBM portfolio together. I mean, what we're really focused on today is the Carson project. And it doesn't mean there won't be others in the future, but right now that's what we're focused on as partners.
Okay. Thank you, Tom.
Thanks
Alex. We will now take our next question from Linda Tsai from Barclays. Please go ahead. Your line is open.
Hi. How does the Apple at Scottsdale differ from the one Broadway Plaza? On the last call you noted that the Broadway Plaza has the new Apple format, does Scottsdale too?
Linda, it's Doug. The Apple at Scottsdale is a 2 flagship. It's 15,000 square feet, whereas the 1 at Broadway is smaller than that and it fits alone. So I guess the real answer is Scottsdale is their flagship and their flagships are very few and far between. Linda, hopefully you'll be joining us for the tour of Broadway Plaza next week and you can take
a look at that store, which is also a great store, great looking, relatively unique in the shape of an iPhone.
Wow. Yes, I'll be there and I look forward to it. The occupancy for your Group 45 malls were up quite a bit, up 110 bps and 240 bps respectively. Can you talk a little bit about what drove that and if you expect these increases to continue?
Yes, I think a lot of it is we're finally getting some leasing momentum with the legacy retailers. I mean a lot of the emerging brands and digitally native retailers don't focus on that group of assets. But we have seen additional leasing happening the last couple of quarters with the legacy retailers and that's helped to benefit those assets in particular.
And then the $1,000,000 increase in bad debt expense for guidance, was that due to the 5 bankruptcies in 3Q you referred to earlier? And then overall, do you expect that debt expense to be down year over year in 2019?
Yes, Linda, hi, this is Scott. I'm not sure that we can point to any one specific instance that gave rise to the increase 5 to 6. It's we look at it holistically across the portfolio each and every quarter. So it's a lot of small numbers that end up aggregating. And as you get more clarity as you go through the year, sometimes you need to adjust up or down.
It's been amazingly consistent year over year. Yes, I Yes,
I think you'll find we operate in the $5,000,000 to $6,000,000 band. Yes, if you go
back to 2014, it was $5,000,000 2015, dollars 5,400,000 2016, dollars 4,500,000 2017, dollars 5,800,000 This year, we've got it in at $6,000,000 So it will probably move a little bit, Linda. I mean, we're not giving guidance on 2019 yet. My guess is it would move down, but not significantly.
Thanks.
We will now take our next question from Wes Golladay of RBC Capital Markets. Please go ahead. Your line is open.
Hi, everyone. I just want to go back to that retail sales environment. It definitely seems to be improving. I just want to know if it's broad based. If you can maybe comment on how the bottom end of your tenants are doing, call it the ones that have a 20% plus occupancy cost.
How does that list compare versus maybe a year ago?
Yes. Hi, it's Doug. The mood is definitely changing. And by way of example, 18 months to 24 months ago, we meet with retailers all the time and the conversations revolved around traffic being down in the malls and online shopping, killing the mall business. But fast forward 18, 24 months, and we're still having these same conversations.
But these conversations are much different. They're more about the tenants are talking about their product and they're talking about the services they're providing. They're talking about their experience. They're talking about their marketing and their social media and their influencers. So I think they took the successful retailers, the ones that are performing today, took the last couple of years to really reinvent themselves, to figure out the revised shopping patterns and to figure out the new customer, which is the millennial and the Gen Z.
And in doing so, they're performing much better. I think those that haven't evolved, that haven't focused on the product, that haven't focused on service or experience are the ones you're talking about probably in the bottom 20 percentile. But I think that discrepancy is becoming higher and higher to the better.
Okay. Thanks a lot. We will now take our next question from Samir Khanal from Evercore. Please go ahead. Your line is open.
I know you haven't provided guidance for 2019, but can you just help us walk help us through how to think about sort of capitalized interest for 2019 and maybe the impact of sort of interest expense as we kind of formulate our views for next year?
Yes, Sameer. Scott here. I think you would find that as we look at 2017 to 2018, capitalized interest was relatively consistent. As our weighted average interest rate ticks up, which we do expect that to continue into 2019, you'll find a slight increase that correlates with capitalized interest. I think the big wild card here is the pace at which the Sears stores come back to us.
Bear in mind that once those stores do come back, we will be putting into play the redevelopment plans that we have on the shelf ready to go. And once we do that, we will be capitalizing interest on any costs or basis associated with those stores. So that's probably the wildcard. It's hard to estimate at this point in time given the uncertainty as to when those stores will be coming back. But it's more than likely that we'll see a tick up in that line item associated with Sears.
Okay. And I guess as a follow-up, I mean even on the termination fee, which is also sort of a wild card, but it sounds like you think the environment sort of feels better. I mean is it fair to assume that, that number sort of stays the same or even could come down slightly from where you are this year?
Yes, sure, Sameer. If you look at our history, we probably have a floor that I would peg at around $10,000,000 or so. So for at $14,000,000 today, dollars 10,000,000 tomorrow and the occupancy environment appears to be healthier. I would say it's probably realistic that we'll finish somewhere in between there. Again, yes, obviously not giving guidance to 2019, but that's probably a realistic assumption that we land somewhere in between those two numbers in 2019.
Got it. Okay. Thanks, guys.
Thank you.
We will now take our next question from Michael Mueller of JPMorgan. Please go ahead. Your line is open.
Yes. Tom, I was wondering good afternoon. What were some of the biggest factors that prompted you to bring Simon into the Carson City development? I mean, you obviously did Chicago on your own and that's doing $800 a foot.
Hi, Mike. Yes, it's a variety of things. Look, they're the biggest in the outlet business. They're a great partner. We have a long history with them.
It's a big project. We haven't put the dollars out there yet, but it's going to be well over 400,000 square feet. So it's safe to assume the total cost is going to be well over 400,000,000. So sharing the capital is a positive. It's an environmentally challenged site.
But we just think the benefit of both firms working on that project together, bringing our best efforts and our best people, it's going to have a great outcome. So that's why we did the made the decision. And you'll also recall, Mike, when we did Chicago, we did have a partner at that time. We ultimately bought them out, but we did have a partner, fifty-fifty partner at the time.
Okay. That was it. Thanks.
Thank you.
We will take our next question from Tayo Okusanya of Jefferies. Please go ahead. Your line is open.
Yes, good afternoon. Along those same lines of questioning, we'll be taking this as a sign that as you look as we look going forward, you guys definitely want to be a bigger player in the outlet business?
Tayo, we've said for years that we're not going to do a lot of these. It's going to be really urban locations and unique locations. We're not going to really try to go out there and make it 20% of our business or probably even 10% of our business as it relates to NOI. But when we can find a unique location like Chicago or Los Angeles, this is a tremendous piece of real estate. It's on the 405 Freeway, just south of the 110 Freeway.
There's about 300,000 cars go by it a day, usually very, very slowly because it's bumper to bumper in Los Angeles 20 fourseven, and it's a great location. So LA is underserved as it relates to the outlet business and we think it's a great location, we think it's a great partner and it's going to be a tremendous project.
Okay. That's helpful. And then in regards to merchandising mix, could you talk a little bit about that? I mean, our understanding is that there might be radius restrictions at the drill outlets?
I'm not sure radius restrictions are going to be a real big issue for us. That's quite a distance from the Citadel and the next closest outlet centers are about 50 miles away and that can be 2 hours in LA traffic, 1 Cabazon to the south and then Camarillo to the north. So we don't really think that's going to be a major problem for us.
Excellent. Thank you.
Thank you, Tayo.
We will now take our next question from Caitlin Burrows of Goldman Sachs. Please go ahead. Your line is open.
Hi, good morning there. You guys have consistently reported pretty strong sales growth, but it seems like market rents have kind of plateaued and occupancy cost is now the lowest it's been since like 2012. So I was just wondering, are the occupancy costs retailers are willing to pay lower than before? Or do you think it has to do with the mix of the types of tenants you're working with? Or do you think kind of market rents and occupancy expense sorry, occupancy costs will go back up some?
Well, I think it's
a function of tenant sales growth has outpaced the rent bumps. So we're back in that situation, which is actually very favorable. We think we're going to continue to be able in our leasing efforts to push rate to try to move that occupancy cost as a percentage of sales higher. But I think it's really mathematically really a function of the tenants growing at a 7% pace and the rents not moving up that fast.
Okay, got it. And then maybe just on the Scottsdale Fashion Square redevelopment, could you give us some more details on the timing there? It just seems like with the series of upgrades that you're doing, how long you'll expect that to take to reach the stabilized yields?
Go ahead, Scott.
Yes. Caitlin, this is Scott. So again, this is a multi phased project, right? So as we repurpose the Barney's box, Apple is open, we just mentioned that. Industrious will be opening their co working facility of approximately 35,000 square feet in January, I believe, Doug,
is that correct?
We will expect the peripheral tenants on the 80,000 square foot expansion on the outside to start to open in fall of 2018, but frankly that will continue all the way through the end of 2019. There may be an opening that spills into 2020. So it's going to be relatively well distributed throughout 2019.
The fall of 2018 like now or even the fall of 2019?
I'm sorry, fall of 2019.
Okay. I mean, you're off.
Okay. Okay. So they'll start opening in a fall like a year from now, but it will continue taking longer than that.
Yes. So let me clarify, Caitlin. We've got a pad significant restaurant use that I think will resonate great in the market. That will open in fall of 2018. The balance of the exterior tenancies though will really be sprinkled throughout 2019, probably clustered towards fall
of 2019. That's correct, Scott. And as you mentioned earlier, it will trickle into the beginning of 2020.
Okay. Thanks.
Thanks, Steve.
We will now take our next from Rich Hill of Morgan Stanley. Please go ahead. Your line is open.
Hey, thank you guys. I wanted to go back to your prepared remarks and maybe ask a couple questions about the micro pop ups in the common areas. I was hoping you could maybe share a little bit about how rents compare relative to the in line space, maybe how much of an uplift that's providing to total NOI? And then finally, do you expect to make it these more permanent?
It's Doug. Yes, I think that's the goal. The micro stores are obviously smaller when we're talking about untuck it in the common area. They won't have quite the amount of merchandise, but they'll have just the merchandise and the right merchandise given the market to really test the market in the mall. So our goal and our hope is that they perform well with our long term intent to make them permanent.
Got it. So maybe more of an incubator than a real uplift to immediate NOIs. Is that sort of the way we should be thinking about it?
That's fair.
Okay. Great, guys. And then just one more question. It looked like overage rents were maybe up a little bit more than we were expecting, recognized 3Q 'eighteen is seasonal. But is the higher than at least we were expecting overage rents reflective of the improving sales environment that you've spoke of?
And do you sort of expect overage rent to continue to trend higher on a quarter over quarter basis?
Yes, Rich. Hi, this is Scott. I think that we'd expect it to be relatively consistent. I think we've mentioned in the past that percentage rent is a difficult one to determine. If you're doing your job right, you're rolling percentage rent into fixed minimum rent.
And so you see a natural migration as you roll over leases to more fixed rent based structures. But on occasion, you'll have gross deals where tenants pay percent of sales and it's really somewhat hard to predict. It's hard to correlate bottom line is it's hard to correlate 7% sales growth with percentage rent because not every tenant that is driving that sales growth is actually paying overage rent. So generally, I don't think you can underwrite anything about the sales trends into the future. I don't see it as a declining revenue source.
It's frankly not a significant one. I think I'd underwrite it as relatively flat and consistent.
That's very helpful. Thank you for answering that modeling question. That's all I had guys. Thank you.
Thanks. Thanks Rich.
We will now take our next question from Jim Sullivan of BTIG. Please go ahead. Your line is open.
Sure. Thanks. Tom, maybe I'm going to take another swing at this same issue that I asked you about initially earlier in the call. And let me just start by kind of making a statement that Macerich is not alone in stating that they have plans, developed plans for Sears boxes. And as we all know, this is something that has been a long time coming.
And particularly in Macerich's case, you have you're getting back boxes, which are in some of the most productive centers in the country. And I would have thought those plans that you guys have developed, you have developed in consultation with prospective tenants. So I guess I'm a little bit disappointed that there is a lack of definition as to how many of these boxes are going to be go to new anchors that will be added to the centers that have wanted to get in for a long time and didn't have space available versus how many of the boxes can be redeveloped at a much higher cost, but theoretically a much higher return when you bring in a variety of smaller tenants. So maybe if you could just address, I was just trying to find out how specific are these plans? And on the cost side, just how thoroughly detailed and prep value on that $250,000,000 to $300,000,000 number?
Jim, we're very specific on the plans. What we're not as clear on is when we're going to get these assets back because even the 7th Heritage assets that are on the closure list, that doesn't necessarily mean those leases will be rejected. So until we know the ultimate outcome, we're not going to get too specific on exactly what we're going to do. We know exactly what we're going to do. Our partner knows exactly what we're going to do.
Most of these are joint ventures with Seritage or others. But we're very specific, but it would be inappropriate to be putting forth return hurdles at this point until we actually have control of those boxes.
Okay. And then kind of a follow-up on that question. As you've identified, that's only for a segment of the current 21 Sears boxes that you have. If we were to be very simplistic, if Sears were to liquidate and move toward closing all their stores by the middle of next year, should we simplistically assume that $250,000,000 to $300,000,000 number gets doubled?
No, I wouldn't assume that. I wouldn't assume that's our pro rata share. That touches every single Sears in the first two groups. What is not included by that, Jim, is the 5 locations that are owned by either or Sears. We don't know the outcome of those.
It's going to depend on the price whether we're interested in buying those boxes or not.
Okay. So, Sabotage would be interested in selling their interest in those boxes?
This is not the joint venture assets we have with them, but there's 5 others in the Delaware, Pacific Views, Superstition Springs, I think Desert Sky.
Okay. Very good. Thank you.
Thanks, Jim. It appears there are no further questions.
Well, thank you, everyone. We appreciate you joining us today on this call. We look forward to seeing many of you next week in San Francisco at NAREIT. Thank you.
That concludes today's call. You may now disconnect.