Good day and welcome to the Macerich Company's Second Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Michelle Rass, AVP, Corporate Governance. Please go ahead.
Thank you, everyone, for joining us today on our Q2 2018 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 will turn to our press release and SEC filings for a detailed discussion of forward looking statements. Reconciliations of non 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 Ark Coppola, CEO Tom O'Hearn, Senior Executive Vice President and Chief Financial Officer and Doug Healy, Executive Vice President, Leasing. With that, I will turn the call over to Tom.
Thank you, Michelle. The 2nd quarter reflected generally good operating results as evidenced by the strength of most of our portfolios key operating metrics. As we mentioned several times on our last two earnings calls that the bankruptcies and early terminations in 2017 tempered growth in the first half of twenty eighteen as we've worked through leasing that space up. That being said, the first half of twenty eighteen reflected an improved leasing environment with strong retailer sales, far fewer bankruptcies and a more positive tone from the retailer community. FFO per share adjusted to add back the costs related to activism for the quarter was $0.96 and was in line with our guidance.
Occupancy was 94.3% at June 30th that was up quarter over quarter 30 basis points from last quarter and down only modestly from 94.4% a year ago. The leasing activity was good during the quarter and the economic benefit of that leasing will be reflected in the 3rd Q4. Doug will be getting into leasing in more detail in a few minutes. Same center net operating income was down for the quarter minus 1.6% primarily due to large lease termination revenues of $9,000,000 in the Q2 of last year compared to only $2,400,000 in the Q2 of this year. Same center NOI growth for the quarter excluding lease term fees was up 1.45%.
As indicated on the last earnings call, we expect acceleration in same center growth in the second half of the year. Bad debt expense for the quarter was $2,600,000 essentially the same as a year ago. REIT G and A expense was 5,000,000 dollars down significantly from $7,400,000 in 2017. This decrease was largely due to our reduction of workforce that incurred in the Q1 of 2018 and we expect to continue to see this positive reduction in expense in the second half of the year. This is a good run rate for the balance of the year, the $5,000,000 that we saw for the Q2.
Management company expense was at $21,000,000 down significantly from $26,000,000 in the Q2 of last year. This was also primarily due to our reduction in workforce that we went through in the Q1. At June 30, the average interest rate was 30 basis points higher at 3.8 compared to a year ago. Our balance sheet continues to be in good shape. At quarter end, our debt to market cap was 47%.
The average debt maturity was 5.6 years. Net debt to EBITDA on a forward basis 8.1 times and the remaining 2,000 maturities are very insignificant at 9,000,000 dollars During June, we sold a power center Grande outside of Phoenix. And in July, we sold another power center in Phoenix, the market at Estrella Falls. Both were joint ventures and our pro rata share of the total proceeds was 45,000,000 dollars net of debt $35,000,000 On March 1, we sold a 75% interest in Westside Pavilion in Los Angeles. In an office building in Philadelphia was also sold in March.
None of those assets were in our original guidance for 2018. I mentioned on our Q1 call that we would address dilution from asset sales in the 2nd quarter guidance update. The dilutive impact of the 2 power centers recently sold as well as Westside Pavilion and the office in Philadelphia amounted to $0.05 per share of total earnings dilution for 2018. Guidance has been modified accordingly. We've also reduced our guidance based on our current estimate of lease termination revenue for the remainder of the year.
As a result of a stronger leasing environment and good tenant sales growth, there have been less demand than forecast from retailers to terminate leases early. Accordingly, our guidance for lease termination revenue is being reduced from $22,000,000 to $15,000,000 for 2018. Our assumption for same center net operating income for the full year is also being modified to a range of 1.5% to 2%. Excluding the impact of lease termination revenue on same center growth, that same center growth range assumption would be 2.25 percent to 2.75%. Our new guidance for the full year, adjusted to exclude cost related activism is $3.82 to $3.92 More details on the guidance assumptions can be found in the 8 ks.
Lastly, just a reminder, the lease accounting rules changed starting in 2019. Currently, internal leasing costs are capitalized starting in January of 2019. Those costs will have to be expensed. In our case, we estimate that will have an impact of $0.12 to $0.15 per share that will now be reflected through the income statement rather than capitalized. No change in cash flow, but it will change FFO and net income.
Now I will turn it over to Doug Healy, who many of you had the chance to meet at NAREIT in June. Doug is a 25 veteran of the mall industry and our Executive Vice President will be discussing the current leasing environment.
Thanks, Tom. In the 2nd quarter sales remained strong and leasing was brisk. Portfolio sales ended the 2nd quarter at $6.92 per square foot, which represented a 7.1% increase on a year over year basis. Economic sales per square foot, which are weighted based on NOI were $805 per square foot and that's up from $700 per square foot a year ago. 12 month spreads came in at 12.3%.
Although down from last quarter, they included a large package of 11 with 1 particular tenant averaging over 4,300 square feet. If that package were excluded out, the spreads would have been consistent with the Q1 rate of 14.7% and 15.2% at the end of 2017. These deals were disproportionately in the bottom quartile of our assets.
Average rent
for the portfolio was $58.84 per square foot, up 4% from 56 dollars per square foot at June 30, 2017. Leasing volumes have been strong. During the second quarter, a total of 756,000 square feet of leasing and bringing the total activity during the first two quarters to 1,400,000 square feet. The average term for the lease assigned in the 2nd quarter was 5.4 years, which was an increase over Q1 average of 5.2 years. We remain active with the digitally native brands executing several leases in the Q2 including Bonobos at Broadway Plaza, Madison Reed at
the Village Port of Adara,
2 new 100% pure leases at Kierland Commons and Scottsdale Fashion Square and 3 new beta leases at Northbridge, Tysons Corner Center and Washington Square. In the experiential category, we signed leases with Escape the Room at Chandler Fashion Center and X Lanes at Fresno Fashion Square And we anxiously await the opening of the Ketan Children's Museum at Santa Monica Place in November. Tenant bankruptcies have been far fewer through June than we've seen in 2016 2017. Through the Q2, we have had 8 tenant bankruptcies. Excluding Bon Ton, these affect 79 stores containing 118,000 square feet.
Of this amount, we are forecasting that only 14 stores totaling 20,000 square feet have closed or will close. This compares with year to date June 2017 when we had 12 tenant bankruptcies affecting 146 stores and 551,000 square feet. Turning to redevelopment leasing, construction is now complete on the $100,000,000 redevelopment of Kings Plaza in Brooklyn, New York. As most of you know, this was a redevelopment of a former Sears box, which was approximately 300,000 square feet on four levels. This project was designed to significantly improve the merchandise mix, the shopper experience and to transform the presence of Kings Plaza from Flatbush Avenue.
In July, we opened Brooklyn's 1st Primark store, a new Burlington and new JCPenney. Zara is slated to open on August 23, at which point the Sears building will be repurposed in its entirety. Combined, these retailers are expected to add over $100,000,000 in annual sales to the property. Redevelopment continues on the Fashion District of Philadelphia. It's a 3 level retail hub spanning over 800,000 square feet across 3 city blocks in the heart of downtown Philadelphia.
The scope of this project has increased with the addition of numerous entertainment and dining elements. Estimated project costs are now expected to be in the range of $400,000,000 to $420,000,000 or $200,000,000 to $210,000,000 at the company's pro rata share. We've signed leases or in active negotiations with tenants for over 80% of the leasable area. Noteworthy commitments include Century 21, Burlington, a flagship H and M, Polo Ralph Lauren, Forever 21, Columbia Sportswear, AMC Theaters, City Winery and Dallas Barbecue. The grand opening is planned for September 2019.
So in conclusion, our leasing metrics including sales, occupancy and spreads remain solid. The level of bankruptcies is significantly lower than last year and we continue to lease space to new exciting and cutting edge retailers. And in doing so, our merchandise offerings continue to be among the best in the industry. And with that, I'd like to turn it over to Art.
Thanks, Doug and Tom. Again, welcome to the call. As I look at the quarter, there's a lot to like. Our sales continue to grow very well across the board. Occupancy is not only holding up, but improving.
Leasing spreads, which now goes back multiple years, continue in the low teens to mid teens area, which is extremely powerful. As Doug outlined very well, much lower levels of tenant failures than the last years. We continue to resale out of non core assets. We don't see much more of that activity, but certainly Westside in particular was something that had to be addressed and we feel that we found an optimal solution for that situation. Leasing volume, if you look at it for the 1st 6 months, is up about 10% in terms of square footage and the quality of the leasing has been very good.
Our ABRs, average base rents in place, are up 4% year over year. As Doug mentioned, we had a terrific, terrific opening of Primark at Kings Plaza. J. C. Penney recently soft opened Burlington Coat, which is up on the 4th level of the Sears building not connected to the mall, had a very, very good opening.
They're all reporting terrific results. Primark in particular sees this location as their new flagship for the U. S. And early results based upon traffic and observed sales are outstanding. A couple of days ago, we had a terrific opening of an Apple store at Broadway Plaza that I'll touch on later.
There's been lots of good activity in the leasing side with particular strength in the beauty category and there are a number of new beauty concepts that are emerging that we're very excited about. The experiential retail area of our company, there are tons of new ideas that are evolving. We think these are important elements that we are going to be adding to our centers. We've announced our first co working tenant and location at Scottsdale Square in partnership with Industrious. We're very excited about that.
We had alluded to co working about a year ago with you all and we said that we see that in a number of our centers. And so we've announced that it's at Scottsdale and there'll be others to be announced on that in the future. So there's a lot to like. Obviously, the one thing none of you like or that I don't like is when a company has to reduce guidance. When you look at the two reasons that we adjust our guidance, I think they were fairly well telegraphed in our last call that as the dispositions realities that we would address the impact of those if they happen on this call, which we're doing.
And the other obvious point that caused a reduction in our range is the fact that the leasing environment and the tenant failure rate has improved. To me, these are both very good things. As I move away from that and I think about what we're doing in the development side of the business, I actually want to talk a little bit about Broadway Plaza again. That continues to evolve and do terrific. Sales are outstanding there.
We're virtually 100% leased. Just a few days ago, Apple opened one of their next generation stores at Broadway Plaza. And this features a store that integrates outdoor spaces with the indoor spaces and it's really intended by them and us to be a place for folks to gather. The outdoor spaces will be gathering and will integrate the store with the rest of the center. And then inside the store, it's a gathering space that Apple, I believe, calls Today at Apple, where they host educational creative sessions all towards creating a community gathering location.
So store footprint and prototype continues to evolve and continues to be even more of a draw to our properties. As Doug mentioned, the Kings Plaza complete remerchandising of the Sears box has been extremely well received. Early reviews as we look at our traffic in that center compared to traffic at Queens Center, for example, and even Green Acres is that since Primark is opened, traffic at Kings Plaza is actually up about 7% on a comp basis compared to Queens and Green Acres, which both have had very good traffic, but it just shows you that we're reestablishing this as a very important retail location. We're very excited about what we've done there. New to the development pipeline is Scottsdale Fashion Square.
This is a little bit of a different type of development because it's a series of developments. And when we looked at it and we took a look at the dollars involved with the series of developments, we felt that it was appropriate to put it into the supplement. It is not one area, it is not one expansion wing, it's not one new building. The intent of what we're doing there is to elevate Scottsdale's position and to further enhance its position in the luxury marketplace. We have terrific lineup of luxury tenants there already and with more to come.
We also are repurposing the Barneys anchor spot with a co working location of Industrious and a new tenant to be announced in the very near future. We're adding 72,000 feet of new exterior GLA, including 8 critically acclaimed restaurants, 2 of which are luxury are in luxury flagship locations as well as Equinox. So this is a center that's performing extremely well and it's always great to go ahead and take a center that's doing great already and to even accelerate its growth and to set it up to even be more dominant for the future. So look, overall, I think we have a very good quarter, a very good first 6 months. And my outlook for the rest of the is very positive and I'd like to open it up for questions.
Thank We will now take our first question from Jim Sullivan. Please go ahead, sir.
Thank you. Hi, Art. Quick question just regarding the interplay between the guidance, the indicated guidance for 2019 the expensing versus capitalizing of leasing costs on hand with there significant positive variances here in the quarter 2018 about the management company operating expense and the G and A line. So I guess it's kind of confusing, but my basic question is the run rate for the balance of this year for both management company operating expense and G and A expense? And then for that $0.13 negative impact next year, is that going to be between both items, both line items or the primary operating expense line?
Jim, you're breaking up a little bit there, but I think I've got the essence of your question. In terms of the positive impact on expenses in both REIT G and A and the management company expense, this quarter is a pretty good run rate to use going forward. In terms of leasing that would be at the property level rather than in the management company expense level as the leasing personnel would be allocated to each property. And it's just a change in the accounting rules. They're not finalized yet in terms of how that will happen.
But as long as there are internal leasing costs and it's got a salary or even a bonus, it's got to be expensed rather than capitalized. And we expect that to be in the range I mentioned of $0.12 to 0.15 dollars Coincidentally, they're approximately the same size, the savings from the reduction in force and expense. But that won't change the cash flow from each asset. It just moves it from the balance sheet to the income statement.
Okay. Very good. Thank you.
Thanks, Jim.
We will now take our next question from a Jeff Donnelly from Wells Fargo. Please go ahead, sir.
Good afternoon, guys. Good afternoon. Good afternoon. Just a question concerning the reduction in lease termination fees. I understand the reason that you guys had given in your release.
I'm just curious, are those fees budgeted on a space by space basis, meaning you pick situations where you thought tenants might be open to termination and then later we're not? Or is the fee just budget as a general estimate? Because I guess I'm just wondering if these are situations that could come around again for you guys or you think that sort of past?
Jeff, that's a general estimate. We base it on history. Occasionally, as we come into a year, we have some specific knowledge about a tenant who's interested or where we're negotiating, but that tends to be a very small percentage of the total. So as we came into this year, we used the same roughly the same lease termination assumptions as we had actual expense in 'sixteen and 'seventeen of $22,000,000 And as we are now midway through the year, we look out there, we just don't think that's realistic. There's fewer tenants that are interested in negotiation for early termination.
The environment's better. And we decided to make the revision based on our view of the balance of the year.
And maybe just one follow-up if I could.
Art, I think mentioned last quarter
that your partner had realized a pretty impressive cap rate on Broadway. See any other mall assets or portfolios coming to the market that would extend that pricing in the market?
You should talk to your brother in law's at Eastern. They'll tell you all about it.
Okay.
I don't
know what the exact relation is, but you're affiliated
with your cousin.
I don't know. I can't comment on that. But I do see the trade on Broadway as being very is being a very positive multiple. And that transaction,
We will now take our next question from Alexander Goldfarb, Sandler O'Neill. Please go ahead, sir.
Hey, Art. Hey, Tom. Just the first question is the $19,000,000 of activist expense, Taubman spent $5,000,000 that was against John Litt who actually succeeded against the Board. You guys didn't have a similar I mean wasn't anyone trying to counter and run against the slate. So curious, I mean, it's 4 times the amount they spent.
Can you just walk us through what this $19,000,000 was about? It's rather obviously a big number, especially in comparison to what Taubman spent with their activists.
Alex, I'm not going to try to compare ourselves to our friends at Taubman, although their expenses I think will come in over more than 1 quarter. Ours I believe will be isolated to just this quarter. And those costs were almost entirely legal and advisory costs. We have been well advised and we think it's best practices for a company to be well advised and it's not only good for us but our stockholders to continue to be well advised and that advice can be expensive at times.
That sounds like a great way for those people providing the advice. But so Tom, you're saying it was just a few we won't see any lingering contractual payments beyond the Q2?
No, I think that includes everything, Alex.
Okay. And then if I could just ask a follow-up. Can you just go through the $0.05 solution, because I'm coming up with like a $0.01 or Hudson on their call yesterday, a positive $0.005 and you guys have I would think the impact to you would be the same. So can you just walk through the $0.05
Yes. I'm not sure how you could have possibly calculated the power centers if you didn't have a cap rate. The power centers are close to $0.02 Yes. Power centers are close to $0.025 of dilution. They were sold non core assets, very tertiary markets, Casa Grande is 25 miles from Phoenix.
And those were a blended double digit cap rate. So obviously there was dilution there. Westside Pavilion, we're selling off 75% of the FFO that was generated there. So that's roughly $0.02 for us. I'd be happy to walk you through the minutiae of that offline though.
So feel free to call me after the call. And the Philly office was about a half a penny. So none of those individually were headline news, but you combine them all and it's about $0.05
Thank you, Tom. Thanks.
We will now take our next question from Christy McElroy of Citi. Please go ahead.
Hey, it's Michael Bilerman. Tom, I was wondering if you can maybe just give a little bit more color about when the $20,000,000 was spent. Tom and did have $26,000,000 actually over their 2 different proxy campaigns as well as dealing with 2 different activists. Dollars 19,000,000 even if they're paid hourly, seems like a lot of hours for lawyers and bankers on something that was not even public. Give a little bit more color.
For starters, they're not paid hourly. That's not really how it works. And as you know from observing the public filings, we had significant activists in the stock starting in November of 2017. So the work really started at the end of last year. Just ultimately the expenses all came through in the So in some respects, that work had been going on for 6, 7, 8 months, the advice and legal services.
And I guess what's the breakdown between banker fees and lawyer fees? And is there any executive management retention that's the other thing that Taubman had in their numbers was retaining management, the expense through that line?
No. We would 90% of the cost was legal and advisory and I'm not going to break it out between the 2. In the remaining amounts, nothing was material and there was nothing for retainage.
And this was never something you wanted to disclose as it was going on? Because I think there was a lot of questions that came up on these calls about activists and campaigns and things like that. And you guys pretty much said, yes, you always have conversations. You didn't feel like this was a necessary thing to talk about given the size of the expense?
Well, Michael, I think you've probably followed some other companies that have had activists involved. And obviously, there are expenses that are included in that. And we were no exception. It's just you don't owe any dividends until you've incurred it. So
we disclosed
the way it was. Okay. Thank
you. We will now take our next question from Todd Thomas, KeyBanc Capital Markets. Please go ahead.
Hi, good afternoon. This is Drew on for Todd today. Just there's been a bit of volatility
in some trends in the
C suite obviously. Do you see any areas of the company where you might need senior level executives in the future? Can you kind of foresee anything of that nature? If
you could just comment on that, that would be great. Thank you.
No. I think that we have an incredibly deep venture. We've got a lot of terrific folks. While Doug, for example, who's new to this call and new to meeting with you all has been in the industry for 25 years. He's been with us for the last 15 almost 15 years.
So we've got a terrific bench here, and it's we don't see anything significant in that area at all. A great, great team and there's an opportunity here for people that have been contributing here to really help take this company to the next level. Tom, if you want to add to that, please?
No, I think I went through some of the team members on the last call and their experience and we've got a lot of people who have been in the business a long time and are very capable and for much of our public life, we did not, for example, have a Chief Operating Officer. And we feel no reason to do that now given the talent of not just Doug, but Olivia Lee, Ken Volk and a number of other people at the SVP level.
Thanks guys. Appreciate it.
Thanks Todd.
We will now take our next question from Michael Mueller, JPMorgan. Please go ahead.
Hi. Two questions. First of all, the line keeps cutting in and out. And I didn't catch what you said, Tom, about the geography of the lease, the new lease expense of 12 to 15. Just wondering if you can repeat that.
And then also it just seems kind of late for a scope change at Philly just given how close you were to the original opening date. So wondering what drove it all? And then also how well leased was it before you expanded the scope?
Yes. Mike, on the leasing costs, that will be at the property level. Each leasing member of the staff is allocated to a property. So that will be at the property level, shopping center expenses.
Okay.
And then in terms of Philly, Doug may comment on Art a little bit. The scope evolved because that project was originally going to be almost exclusively fashion outlet. And as we spoke to retailers, we found out there was a very significant demand for full price. There were entertainment users that had a high interest in being there. And it was really leasing driven and that evolved and moved the scope to a direction more of a hybrid center that contained uses in all those areas, some entertainment, restaurant, some discount with Burlington and Century 21, full price as well as some fashion outlets.
So, we really let the retailers date where we went with the scope and the design of that project.
Yes. I'll just add a little bit and then we'll move on. We apologize by the way to all of you for the reception. I just got an e mail from our IT department that it's evidently on the vendor side, the host side of this. So sorry about that.
So I'll speak up, maybe that will help the reception. Tom brings up a very good point. When you're opening something that is more of a pure fashion outlet center, it's fine to open it up in stages. But when you're opening up something that is reliant on so many interchangeable pieces that are all complementary and synergistic with each other. We just came to the conclusion, especially with some new demand from some anchor tenants that came in relatively late to the game, that it would be best to have them all open up at once.
And again, to some degree, it was new demand from folks in the last couple of months, take significant blocks of space, but they just wouldn't have been in a position couldn't have been in a position to get open this year. So we sat down and looked at it and determined that it would be best to go ahead and have a cohesive opening and we and a terrific opening. So it's really just an evolution of the tenant mix there and we feel very comfortable and I know you'll hear a lot more from our partner on their call tomorrow about where we're headed. We just came to the conclusion that a great opening for a center like this is really important and this was the best way to deliver that.
Okay. Thank you.
Thank you.
We will now take our next question from Wes Golladay, RBC Capital Markets. Please go ahead.
Just want to look at the guidance for the back half of the year. Is that just a portion of temporary tenants to permanent tenants? And do you see any risk in delays of openings just because of the construction shortage, labor shortages that are going on throughout many industries right now?
Wes, we don't see delays in that regard and we continue to push from temporary tenants to perm with success. So that will continue throughout the year and into 2019 as well. But I don't believe we're expecting any build out delays with the deals we've signed that haven't opened yet.
Okay. And is it fair to assume that's the big driver? There's nothing on the expense side from operating, it's mainly the just turning the conversion there?
That's correct.
Okay. Thanks.
Thank you.
We will now take our next question from Linda Tsai, Barclays. Please go ahead.
Hi. The indooroutdoor next generation Apple Store at Broadway Place, is that over 10,000 square feet? And if so, excluded from sales productivity calculation?
I believe it is over 10,000 feet.
Okay. And then, it sounds like Primark
has Linda, I'll get back
to you
with the exact on that. I was up there about a couple of weeks ago and it's probably pretty close to 10,000, but it might be under. But I believe it probably is over, in which case it would be excluded, but I'll get back to you on that if that's not correct.
Is that kind of a format going for Apple Stores where it might be over 10,000 square feet? Do you have any sense?
The one thing I do know is that we're not empowered to speak on behalf of Apple. We can tell you what they've done, but we can't tell you what they're about to do.
So what the next generation Apple Stores that exist, are they 1,000 square feet?
I can't comment on what they're going to do in the future. But look, the most important thing here is what it does for the center. If it's over 10,000 feet with our protocol, we it wouldn't be included in our sales reporting. But what it does for the center, which is really the important thing is it creates a new community gathering spot and really creates a new anchor. And that is what I focus on.
And it's not whether or not I'm going to include it in my sales per foot reporting, which by the way, if we were including it in that would obviously most likely increase the reported sales per foot. But look, the important thing is what does it do for the real estate? What does it do for traffic? What does it do for the cross leasing? That's what I focus on.
And I'm very excited about this particular store that we just opened. I'm very excited about other potential new stores that we're talking to them about. And as they open, we'll talk about them after they open.
And then it sounds like Primark also has a decent impact on traffic. Is there opportunity to add them to any of your other centers?
We have a terrific relationship with them. As I mentioned, our store with them in Kings Plaza is likely their flagship location for the U. S. And we're both very pleased with the relationship with each other. We're very pleased with what it's done for traffic.
It's absolutely measurable, as well as leasing, and we definitely are talking to them about other locations. Absolutely. We think they're terrific.
Thank you.
We will now take our next question from Caitlin Burrows, Goldman Sachs. Please go ahead.
Hi, Keith. I guess I was just wondering with the strong sales growth that you guys can post, I was surprised to see the leasing spreads come in a little bit. Now you mentioned that that could have been due to a package deal. So at this point, I was just wondering what how you're balancing the leasing pushing pricing and the ability that you do have to push when leases come up for renewal or you're signing new leases?
Well, please take this the right way. But when you have the leading leasing spreads in the industry, it's a little hard to view that as a bad thing. I've always said and it is absolutely true that sales and leasing have a very strong correlation, but it is not an absolute solid line of connectivity. It has more to do with the productivity of the center. And frankly, I believe that as a forecast for you, even though I would I'm very happy to be able to report great sales that and I've said this on other calls, sales per foot are look, they're a 2 dimensional measure.
We know that you want to hear them, we give it to you. But when I think about it, sales, I think about frankly the commerce that's being generated from the campus. So frankly, I would rather own a center that does $1,000,000,000 of business and does $500 a square foot than a center that does $2,000 a square foot, but only does $50,000,000 of sales of, let's say, a specialty center. So
you have
to think about the economic engine. And again, look, we're thrilled at the sales that we're generating. We think about campus sales, meaning total sales, really at least as much as we think about sales per foot. But look, these are great things. Industry leading leasing spreads, very strong sales growth, both on a sales per square per foot as well as total sales.
These are all very positives and they do become reflected in the demand that we get for our centers and the demand that we get for our centers is picking up nicely. Thank you.
And then just another quick one. In terms of the lease termination fees we're still expecting for the second half of the year, would you say those are still kind of a better estimate that could change? Or is it more since we're to the end of the year now specific tenants that you're expecting to move out?
It's about half and half at this point, Caitlin. We do have some specific tenants we're negotiating with that we expect to see the lease termination agreements come to fruition. And some of it is also just an assumption that hasn't been specifically identified. So it's about half and half at this point. But we're pretty at this point, we're pretty comfortable with that $15,000,000 revised guidance.
Got it. Thanks.
Thank
you. We will now take our next question from Ki Bin Kim, SunTrust. Please go ahead.
Thanks. Going back to the Fashion District development, I know it's evolved from like the initial onset of being something similar to like the Chicago version where it's kind of discounted luxury outlet to what it is today and you guys announced the scope by $75,000,000 I think the ROIC on that is about 4%. So I know I get the whole story by just looking at the numbers on Excel, but and there's a definite real estate element to it to make the center more viable longer term. But could you talk about the factors that weighed on your decision to change the mix of the tenants and to change the scope?
Well, first of all, we added square footage to the project that was not previously in the project. When we first announced the project, we did not intend to develop the 3rd level above the street. It was the concourse, which is connected to the subway stations, street plus 1. So we added to the scope in terms of size. And I did see your note and it's a legitimate question, but it's not a binary answer about the incremental cost and the interpolation of the return on the incremental dollars.
It didn't work that way. So look, we're just bringing everybody up to date on the status of the leasing, the status of the opening, the status of the spend and the status of our projected return. We're very pleased with the demand that we're getting. It's all demand driven. And we are excited about the opening that's scheduled for next year.
And is Italy still a tenant there potentially?
They never were. No, they were talked about early days, but that was 3 years ago.
Okay. All right. Thanks.
Thank you.
We will now take our next question from Jeremy Metz, BMO Capital Markets. Please go ahead.
Hey, guys. I jumped on a little late. Hopefully, you didn't go over this, but I was just you spend a lot of time talking about digitally native tenants and using space more as a sort of laboratory. You previously indicated that some of that work starts showing up in 2019 and forward. But as you do this, should we expect to see temp or some of the leasing activity tick up from where it's been running?
And then how do you protect yourself from a cost or CapEx perspective in terms of potentially increasing churn as a result?
You were breaking up a little bit during the question, but I'll try and answer it for you. Look, our overall outlook is very positive in terms of what we see with the digitally native brands. We are actually creating laboratory space within our properties, and we're starting it at Tysons Corner later this year, where we're taking an 11,000 square foot location, and we're going to allow digitally native brands. We have it configured with modular walls and modular spaces in the space so that we can break up that 11,000 feet into 18 different configurations. And on that one, that entire space is intended to be temp, not temp from the viewpoint of the type of tenant that you put in there, but the idea is that it's a testing lab for digital brands to test the traffic and the business they can do in a property.
And then if they do well, which we hope they do, then they will take a permanent location. Now by doing that and by doing it in a modular way, it reduces the cost of opening a store and the investment that the brand and we have to make dramatically and it makes it far easier for us to allow people to do something that we call a pop in as opposed to a pop up, which to me is they can come in for 3 months to 6 months to a year. And if they like it, then they can go ahead and take a permanent location with us. And we will likely be adding these, say, 10,000 foot laboratory spaces, which we call BrandBox, to many of our centers over the next couple of years. So look, we're very bullish on what's happening here.
I will say that overall that with the digital brands that they are looking for permanent locations, but we're going to be willing to let them go ahead and test the market with a temporary type of lease, and we're actually dedicating locations within the center as laboratories for them to do so. I'm very bullish on what's happening in this space and it's clear to me that as the brands begin to get confidence in their ability to operate stores, then the same energy that they put into creating their fundamental business when they were born online and they raced against the clock to get as big as they could, as fast as they could, that they're going to begin to do the same thing when they go offline. And so there's definitely going to be a hockey stick graph that's going to is going to track the store openings of digital brands. It will be slow in the beginning. They will try a pop up here and a pop up there, try a store here and a store there.
But we see absolute tangible evidence that as they get that confidence that then they want to talk about how many stores can we get open. And that's happening with the number of our tenants and we're very bullish on it.
Appreciate the color.
Thank you.
We will now take our next question from Christy McElroy of Citi. Please go ahead.
Hey guys, thanks for allowing the follow-up. Just wanted to follow-up on Ki Bin's question on Philly. If it wasn't a lower yield on the incremental spend and the added square footage, was it because of the was it a function of the longer carry without NOI flow because of the delay or are rents on the project coming in lower than expected? And just related to that, presumably you had previously expected some NOI contribution from Philly in 2018 in Q4. Did that factor into guidance, the guidance decrease also?
I'll let Tom go ahead and address that question, and I'll come back to the return after he finishes. Up.
Right. Philly was in our thinking, it was not a real significant amount of NOI that would have been coming in this year. It was a little bit and we adjusted the range, we factored that in as well.
And as far as the returns, Christy, let's not hold us to a standard that's different than everybody else in the universe. I mean, nobody gets into that level of detail of saying, well, this tenant is paying this and that tenant is paying that. It's there must be 55 different elements that went into as we expanded the size of the project, the scope of the project and the identity of the tenants that we brought into the project. And so we're just doing our best to report to you the exact timing, the exact cost and our exact expected returns and to give you color on the names of the tenants, which I believe that our partner has been provided a significant amount of color on that as recently as today or they will tomorrow on the names and the types of uses. So we feel very good about where we are, but it's there must be 50 factors that go into the question that you asked and it's not you can't just look at the incremental spend and the incremental return and then try and draw a solid line.
It can't be done. It's not reality.
Sure. And I totally get that. I guess we're just trying to wrap our arms around whether it's on the rent side or the cost side, especially just given the environment for construction costs. But my follow-up question is, it's actually a follow-up from Caitlin on the term fees. I appreciate you were providing the same store to calculate excluding lease term fees.
I'm just trying to look at your revised guidance range of 1.5% to 2%. What would that guidance be excluding the lease term fees? I think we have kind of the moving parts on the whole. You're expecting another $9,000,000 to $10,000,000 of lease term fees in the back half of the year, and that's roughly in line with what you had in the second half of twenty seventeen. But I'm just not clear on how much of that was attributable to the same store pool?
Is that
Well, again, it's an assumption. It's not necessarily assigned to a specific center or tenant. So you can assume all of it is. I mean, I think I gave the range. We expect our same center growth excluding lease term fees to be 2.25 to 2.75 somewhere in that range for the year.
Okay. So all of the $10,000,000 that you booked in the back half of last year that was all same store?
Yes, I believe so. And if not, I'll get back to you, but I believe it is.
Okay. Thank you so much.
Well, thank you everyone. We appreciate you joining us on the call today and look forward to talking to you over the remainder of the