Good day. Welcome to The Macerich first quarter 2018 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jean Wood, Vice President of Investor Relations. Please go ahead.
Thank you everyone for joining us today on our first quarter 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 refer you to today's press release and our SEC filings for a detailed discussion of forward-looking statements. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included in the earnings release and supplemental filed on Form 8-K with the SEC, which are posted in the investor section of the company's website at macerich.com. Joining us today are Arthur Coppola, CEO, Thomas O'Hern, Senior Executive Vice President and Chief Financial Officer, and Scott Kingsmore, Senior Vice President, Finance.
With that, I will turn the call over to Tom.
Thanks, Jean. Welcome everyone to this, our 100th earnings call as a public company. The first quarter reflected generally solid operating results as evidenced by the strength of most of our key operating metrics. As we mentioned on our last earnings call, the bankruptcies and early terminations in 2017 continued to temper growth in the first half of 2018 as we expected, as we worked through the lease-up of that space that we'd gotten back from the bankruptcies. That being said, the 2018 year started on solid footing with good retailer sales, far fewer bankruptcies, and a more balanced tone from the retailer community. FFO per share was $0.82. That was adversely impacted by $12.8 million of severance costs in the quarter related to our first quarter reduction in workforce. Going forward, we expect to see a $1 million per month expense savings as a result of that.
Occupancy was 94% at the end of the quarter. That was down 30 basis points from a year ago. The decline versus a year ago is a result of the record number of bankruptcies we saw in 2017. Same-center growth was flat for the quarter. This was again primarily caused by the occupancy loss versus a year ago. We expect the second half of the year to be strong, and we are comfortable with our same center NOI growth guidance for the full year 2018 of 2%-2.5%. Lease termination fees were $2.9 million for the quarter, up slightly from $2.7 million in the first quarter of 2017. Bad debt expense at $1.7 million was essentially flat with a year ago. At March 31st, 2018, our average interest rate in the portfolio was up 22 basis points to 3.79%. We expect this trend to continue.
The balance sheet continues to be in good shape. At quarter end, our debt to market cap was 47%. Our average debt maturity is 5.9 years, and we only have $9 million remaining in 2018 maturities. On March 29th, we closed on a $450 million 12-year fixed rate loan on the recently expanded and renovated Broadway Plaza. The fixed interest rate is 4.18%. This is a great long-term loan with two of our strong relationship life insurance companies, MetLife and Northwestern Mutual. At the time of the financing, Broadway Plaza was not encumbered, so we took our share of the proceeds, $225 million, and paid down our line of credit. In the earnings release of yesterday, we reaffirmed our estimate of diluted FFO per share guidance of $3.92-$4.02. As I mentioned previously, we remain comfortable with our same center NOI growth range in 2%-2.5%.
Looking at the leasing environment, the first quarter performance reflected good leasing volumes. Whereas 2017 began with a high degree of uncertainty regarding specialty store bankruptcies, retail sales trends, and department store closures, the 2018 year started on more solid footing with good retailer sales, far fewer bankruptcies, and a more balanced tone. Trailing 12-month leasing spreads were positive 14.7%. The average rent for leases signed during the trailing 12-month period was $59.12 per square foot, and that's 14% higher than the previous year. Clearly this is a sign of strength in the leasing environment. The average base rent in the portfolio rose to $58.44, which was a 3.8% increase over the prior year. During the quarter, a total of 614,000 square feet of leases were signed.
They included Life Time Athletic at Broadway Plaza, True Food and Shake Shack at Country Club Plaza, H&M at NorthPark, HomeGoods at SanTan, Johnny Was at La Encantada, Broadway, and [Kierland]. During the first quarter of 2018, the square footage of non-anchor space for tenants in our portfolio filing bankruptcy was only 112,000 square feet, and we only expect 14,000 square feet of that space to result in rejected leases. That compares to lease rejections of 154,000 square feet due to the first quarter 2017 bankruptcies. A significant improvement there. Portfolio sales ended the quarter at $686 per square foot, a 7.4% increase on a year-over-year basis. Economic sales per foot were $800 per foot for the 12 months ended March 31st, 2018. That compared to $741 for the 12 months that ended March 31st, 2017, and that's an 8% increase.
During the quarter, Nordstrom announced their planned relocation to Country Club Plaza in Kansas City with an opening in 2021. The addition of Nordstrom to this iconic asset advances the vision that Macerich and Taubman share to further Country Club Plaza's position as the premier center in that region. Many of you have asked if we would replace Bob Perlmutter, I'm going to take a moment to comment on our senior leadership group in leasing and operations. Today, as it's been for the last several years, leasing is handled and run by Executive Vice President of Leasing, Doug Healey. Doug is a very experienced and respected leasing executive with 13 years at Macerich and 14 years at Wilmorite before that.
Asset management is headed today by two senior executives, in Dave Short, who has 31 years of mall experience, and Cory Scott, who has 10 years of experience with Macerich and nine years with three other mall companies before that. Marketing and business development will continue to be run by Ken Volk, who is a senior vice president. Ken has 11 years with Macerich, plus 18 years with two other mall companies. Portfolio operations is led by Olivia Lee. She's a senior vice president and has 13 years of experience with Macerich and 13 years before that in related fields. You can see, we have a very talented and experienced team running leasing operations and asset management.
For the past 25 years, much of the time, we have operated without a COO, and in fact, that was the case before we promoted Bob Perlmutter to that position two years ago. With that, I'll turn it over to Art.
Thank you, Tom. As Tom was talking about our people, I'd like to comment on that. Look, we obviously are a real estate company, and we have a terrific platform of properties. As I think about what really makes Macerich special, it's our people, and that's really our biggest asset. As we think about that asset, we are certainly blessed to have a very deep bench with long tenure. A lot of these people, frankly, have never worked at other mall companies, and they've been trained by us over long periods of time, and they are very well positioned to take us into the future. Certainly, two of our greatest people assets are Scott Kingsmore, who will succeed Tom O'Hern at the end of this year as our CFO.
Many of you will get to know Scott, you'll find that he is extremely knowledgeable about all aspects of our business. Our greatest people asset at this moment in time is Tom O'Hern. With this terrific team that we have here, the key question in terms of succession for me was who is the right leader for this group of talented people? I congratulate our board of directors in selecting Tom to succeed me. He is absolutely the right person to lead our team. Looking at our business, it feels to me like we are at an inflection point in terms of the retail cycle. It feels to me that retail sentiment is definitely on the uptick.
Retailers are making a lot more money because of the tax cuts. It's hard to ignore the coincidence of the tax cut and extremely strong comp sales over the last six months. These sales trends that started in Thanksgiving through December have continued through the first quarter. They're really across the board. As we look at our top tenants in terms of their sales performance on a comp basis in the first quarter, names like Vans that are up 47%, Hollister is up 30%, American Eagle is up 15%, comp Gucci up 52%, Restoration up 56%, Apple and Tesla up 30% and 15% respectively, even PacSun is up 24%. The sales trends are really across the board, not only with the legacy retailers, but also with the new digital retailers and new concepts that are coming to our centers.
As a lot of the sell side analysts attended Shoptalk this year, they began to see our vision that the digitally native, vertically integrated brands are going to comprise a growing share of our merchandising opportunities within our centers. They all aspire to open stores with us, they are going to be, in my view, the superstars of the next three to five years. Another inflection point that I see is that we see stores reinvesting into their fleets. One of our top department stores by size, I'm not referring to Nordstrom, you can probably guess who it is, has recently announced that they're going to be investing in growth initiatives at their top 50 stores, of which we have a disproportionate share. As we think about the inflection point, leasing activity remains strong. Our ABRs are up significantly, we're getting new concepts in our malls.
Looking to our portfolio now and just commenting on key things that are occurring across the board. As Tom mentioned, we have Nordstrom has announced they're coming to the plaza in Kansas City. That's a terrific opportunity for that asset. We're wrapping up the remerchandising of Kings Plaza Sears box with JCPenney and Primark scheduled to open roughly over the Memorial Day weekend. We have signed a new deal with Life Time to join us at Broadway Plaza. We talked about them in the last call, they're going to be terrific. We continue to bring new experiential retailers to our centers. We recently opened, during this past quarter, Candytopia at Santa Monica Place. They're in 15,000 sq ft. They opened in March. It's basically an Instagrammable moment all about candy. It's similar to the Museum of Ice Cream that some of you may have heard of.
It brings people from the entire region to the center. They're selling on average 2,000 tickets a day at a price of $30 to come and see this exhibit. I attended over the weekend, the kickoff for the new children's museum that's coming to Santa Monica Place, which also is going to be a terrific experiential retailer. Other key developments that I want to just touch upon. In our supplement, you'll see a new reference to Westside Pavilion. What I would note about that is that we wanted to mirror our disclosure with our partners, Hudson Pacific's disclosure. Even though it shows up in the supplement, including their acquisition price, the contributed value of the asset, when you look at the net incremental spend of $260 million, give or take, the net cash spend from our side is fairly nominal. It's $15 million-$20 million, give or take.
We believe that they are absolutely the right partner for us there. We have significant demand for the conversion of that to creative office. We see that alliance, as I mentioned in our last call, expanding to other properties and other opportunities, particularly in gateway cities. You also would've noted in the supplement that Fashion Outlet at San Francisco dropped off of the supplement for now. That project is being completely rethought, given the delays that occurred during the entitlement by the master developer as to size, scope, timing, dollars, and even the certainty of the execution on that project. We just felt it was best to go ahead and take it off of the supplement. One topic that I know is of great interest to all of you, and then we'll open up to questions.
As we talked about in our last call, our partner had marketed their position in Broadway Plaza in Walnut Creek over the past couple of months. Demand was very strong, even though, given the structure of the deal being a 50/50 deal, the sovereign wealth funds were not able to bid on it because it would've triggered a complete Prop 13 reassessment, so it was really just the domestics. I'm not going to put out a cap rate because frankly, I'm not a party to the transaction, but I am an observer. What I would guide you to is that the cap rate on forward NOI, and forward really means next year's NOI, is much closer to a four cap rate than it would be, say, a four and a half.
Some people think of the cap rate as looking a lot like the interest rate on the loan, which was 4.18%. With that, I'd like to open it up for questions.
Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We ask that you limit your questions to one question and one follow-up question. We'll go first to James Sullivan with BTIG.
Hey, Jim.
Yes. Hi, Art. Quick question for you on Broadway Plaza. I know that that was included in the sales results for last year, a very robust number, over 1,300 a foot. I just wanted an update. My understanding was that there were a couple of pieces that had not been completed there in terms of the leasing. I wonder if you could just give us an update on leases signed or tenants pending that are going in, and where that center should be going over the next six or nine months after what's been a pretty strong sales recovery in 2017, with most of the project completed.
Most every inch of the small shop space is spoken for. There will be because of some very significant investments that retailers are making into building out their stores. Those will be still opening up over the next 18 months. The most significant piece that isn't finished and hasn't even started construction is the addition of Life Time, Inc. to the project. That's anticipated, my guess is, to open 18 months from now, give or take. There's significant income attached to that also.
We'll go next to Craig Schmidt with Bank of America.
Great. Thanks. First, Art, congratulations on your impending retirement, and then Tom, on gaining the CEO role.
Thank you. Thanks.
There've been a number of changes in the senior executive suite, and I just wondered if there was anything that was responsible for bringing about these events, and are there any changes that the new management wants to take with Macerich that may differ from the past path?
I'll let Tom go ahead and address that.
Well, Craig, as you saw from the various press releases, Art has been running Macerich for well over 30 years. He's put in a tremendous effort and built quite a company. I think he's entirely entitled to retire when he chooses to. It's understandable. I've got big shoes to fill, and I'm happy to get the opportunity. As I mentioned in my prepared remarks, we have a great team of people here with a lot of experience, and I don't consider them as the bench. They're starters. They've been in the game for a long time. You've met some of them, but they're tremendously talented and we're glad to have them, we think we've got the talent we need to run this company.
We'll go next to Alexander Goldfarb with Sandler O'Neill.
Hey, Alex.
Hey, good morning out there. Again, I'd echo best in retirement, Art, and Tom, I guess now you get the fun of having full control. Just a question on that. One of the people you didn't talk about was the retirement of Randy on the development side, and obviously you spoke about pulling back on Fashion Outlets. Maybe you could just give a perspective on where you guys are thinking about development, redevelopment. Certainly, Simon Property Group seems to be ramping up their redevelopment activity and just thinking about where you guys see that, especially with Randy's retirement, who's taking over on that front?
We have a very deep bench in every area of our company. Randy made that decision well over a year ago. We've broken up that area into an east and a west. The people that are running each of the east and the west have each been with us for close to 20 years. They've been in the business for a long, long time. As you take a look at the actual development pipeline, we're winding down on Kings Plaza. We're going to be finishing up Philly. We've potentially taken San Francisco off the table. Westside Pavilion is going to be handled by our partner.
We're at a moment in time, frankly, where really in terms of just some caution to also thinking about things and also thinking about allocation of capital, that our development pipeline in terms of what's about to go in the ground or what is in the ground is fairly modest. The next leg up on development will be on the recycling of the Sears boxes. We have plans that have been developed that are very specific and are ready to go as soon as we get access to the Sears box. We have said that we don't believe in proactively going and buying Sears out because we believe that there'll be a day we get those back anyway. When those boxes are ready to be densified, we're ready to go, and we're appropriately staffed.
We'll go next to Todd Thomas with KeyBanc Capital Markets.
Hi, thanks. I just wanted to follow up on Craig's question about the Macerich platform more broadly. There has been a lot of change recently with the overhead cuts and your retirement, Bob's departure. I know that the company has sold assets and the platform has shrunk a bit, it seems like a lot of volatility from our perspective. Should we expect to see more change, or should we expect to see some level of stabilization now?
Well, I certainly empathize with you on your view around volatility. Look, this was all a well-thought-out, well-orchestrated, it will be extremely well transitioned, and we are extremely well positioned in terms of the talent that we have on board to take us where we need to go. I understand and I empathize with you that it does seem a lot for you to absorb right now. It is not a lot for us to absorb because, look, we all saw this coming.
We will go next to Christy McElroy with Citi.
Hey, it is Michael Bilerman here with Christy.
Hello.
Christy's here, too. She can say hello.
Always nice to have you both.
Well, there you go. We can only ask one question, so I don't know if I have to say one word and she says one word. I don't know how we'll do this.
I think you can probably do whatever you want to do, Mike.
Yeah, that tends to happen. Certainly, 42 years, I'm sure, has felt like eight decades instead of four decades. Congratulations on your well-deserved retirement. I was wondering if you can spend some time just talking about corporate governance and things that are happening. The company still hasn't filed its proxy statement. You did hit the 120-day window this week where you had to put out some of the historical proxy comp information. Clearly, there's Starboard Value that's out there talking publicly about the company. We've talked about some of the management changes that have occurred. You had Fred Hubbell come off the board recently and put a new director on. Ontario Teachers had submitted in January that they're not running for re-election.
Can you talk a little bit about what's holding up the proxy this year and not setting an annual date and how investors should think about that, and maybe just provide some insights to what's going on from a corporate governance perspective?
Well, actually, that was about seven questions embedded in there, I'll try to take them one at a time if I can, and Art, jump in as well. In terms of governance changes, you may have noticed that we added a new director to our board in the first quarter, Peggy Alford. Peggy comes to us with experience from eBay and PayPal, both places as a CFO, and she's currently the CFO of the Chan Zuckerberg Initiative. Very accomplished, has a lot of experience in the digital world and a great addition to our board. She replaces Fred Hubbell, who stepped off the board so he can focus on his run for governor of Iowa. What was announced in the various press releases over the last couple of weeks is that we're decoupling the CEO and Chairman role, which should be viewed as a positive in governance circles.
Those changes have happened. There may be a number of other things that we're considering that we haven't discussed or are not at liberty to discuss today.
In terms of details regarding directors standing for election in the proxy, that will be included in the proxy statement, which will be filed with the SEC and available to you all within the next few weeks.
We'll go next to Michael Mueller with JPMorgan.
Hi, I echo the congratulations sentiments as well. In terms of guidance, you have no dispositions in there, but you sold the Philly office assets, and I think you have a couple other assets under contract for sale as well. Are they just not meaningful, or how should we be thinking about that?
Mike, we'll probably address that at the next call and with the next guidance. We don't know whether those assets under contract will sell, so we don't want to get ahead of ourselves there. The Philly office is a minor number. We'll also have some timing from the sell-down of our position in Westside Pavilion, but we'll address all that mid-year.
We'll go next to Floris van Dijkum with Bowen.
Hey, good morning, guys, for you. Actually, my question was also related to the asset sales. As we think about asset sales or as we should think about asset sales, are these further pruning of some of your quality malls, or is this JV-ing certain assets, or are you not at liberty to talk about that right now?
Well, the activity so far in the year is a little bit of both. Obviously, the venture that we entered into with Hudson Pacific is relatively unique. The other assets we're talking about are non-core assets. They're not malls, but they're non-core to us, and that's the type of asset we would continue to dispose of as the opportunity presents itself. Not any of the assets listed in our top 30 malls. These are non-core.
We'll go next to Jeremy Metz with BMO Capital Markets.
Hey, guys. Art, I was hoping you can maybe just give a little more color on your decision to step away from the board. I think most of us would understand a desire to step back from the day-to-day, you've been obviously an integral part of building Macerich from the start. You're only in your mid-60s, you're still young. You mentioned the industry being at an inflection point, it seemed like a natural progression would be to stay on as chairman and help shepherd in the next stage, especially just given the significant amount of time you personally spent curating a long shadow pipeline of digitally native tenants.
Well, we just think it's good governance to have as many independent directors as possible. Given that I will not be an employee of the company as CEO at the end of this year, I would be taking up a board seat. If the nominating committee would have nominated me, I would have been taking up a board seat, it would have been still considered to be a non-independent board seat. We just think it's a good idea to have as many seats on the board be independent board seats as possible, that's why that all happened.
We'll go next to Jeff Donnelly with Wells Fargo.
Good morning, guys. Actually, maybe in regards to a similar topic. I was just curious on succession. Did the board make an effort to contact external prospects for CEO or maybe look to Eddie or Bobby, or was this a situation because of continuity, they went straight to Tom?
I'll answer that, I think, and Tom, feel free to jump in. Look, on a regular basis, we meet with the nominating and governance committee, we talk about succession, not only for the CEO role, but for the top probably 10 or 12 positions in the company. Certainly, as we have talked about that for the CEO role, we were blessed to have internal candidates, the nominating and governance committee as well as the board, they were aware of those conversations for the past couple of years. They're also very aware of what other individuals are out there in the industry that could be considered. As I said in my remarks, I applaud the board for picking a great leader. The key attribute to me of a CEO is being able to lead. The key asset that this company has is our people.
There is zero question in my mind that Thomas O'Hern is by far the most qualified person to lead our team. The team is extremely loyal to him. He's very loyal to them. They will follow him, and I think that the team will perform extremely well under his leadership. I really applaud the board. Look, I'm a big investor in this company. I have a lot at stake, and I support their decision 1,000%. Next question.
We'll go next to Ki Bin Kim with SunTrust.
Thanks. Congratulations, Tom and Art. Can we talk about operations for a second? Your same center wide basically flat, occupancy down a little bit, with the kind of built-in escalators and the lease spreads that you've been posting for the past several years
I would have thought the number would have just been better. There's obviously some gives and puts and takes in this number. Can you just talk about what was going in and out?
Sure, I'd be happy to. I think the first point I'd like to make is to send you back to the transcript for the fourth quarter. I think we talked at length about the fact that we would have tempered growth in the first half of this year as a result of filling the bankruptcies last year. It was a record year last year. Unlike a typical year, a lot of those bankruptcies came in the second half of the year. We were optimistic about the second half of 2018 going into 2019, and that was factored into our guidance. I thought we were fairly clear on that, but perhaps not. The real issue here is occupancy. The occupancy level is 94% versus 94.3% a year ago. Also the temporary occupancy has gone up to about 6.4%.
That's up about 100 basis points from 5.3% a year ago. That's lower quality occupancy. That's opportunity for us. Obviously, when you get a lot of space back quickly, you want to fill that space, even if it's with temporary tenants. Yes, the re-leasing spreads are good. That typically impacts 8%-10% of your tenants in any given year are rolling, and you're getting that pickup. Built-in rent increases get straight-lined, and typically they don't end up being more than, on average, 1.5%-2% in a given year. That versus the offset by the occupancy has kind of taken us to flat same-center NOI in the first quarter. Obviously, we feel that's going to accelerate in the third and fourth quarter, or we would not have left our guidance where it is at 2%-2.5%.
The first quarter was pretty much as expected, Ki Bin.
We'll go to Caitlin Burrows with Goldman Sachs.
Hi, good morning there. I guess just similarly on the guidance, I guess on the FFO side. I know you guys mentioned last quarter that the first quarter was expected to be about 20%, but it seems like at the midpoint, you're a little above that. I was just wondering if indeed you are trending stronger than you were expecting, or have the quarterly splits shifted, or maybe just the lack of moving FFO guidance has to do with some of the dispositions we talked about earlier, and that will be assessed later in the year.
No, I think, with the splits we give, obviously there's some rounding in there, and there's a range in there. The first quarter ended up coming in at 21% of the annual. I think originally we'd said roughly 20, just some timing differences in there. I would still say the second quarter's probably 24% of the full year, 25% in the third quarter, and the balance in the fourth quarter. We'll reassess the assumptions and the guidance in next quarter's call as well to factor in what dispositions may or may not have happened.
We'll go next to Vincent Cho with Deutsche Bank.
Hey, good morning, everyone. Just a question on the same store NOI. You talked about sort of what happened in the first quarter being expected. At this point, I know a lot of the leasing for the year is done already. I guess there is going to be some amount of commencements that need to happen to hit your back-half numbers, and I was just curious how much visibility you do have on that at this point based on leases already signed.
Yeah, we think we're going to see the acceleration in the third and fourth quarter, Vin. We've got about 65% of the bankruptcy space that we got back has been permanently leased, and we'll push through the balance of that hopefully in the second quarter. We'll see the real pickup in the third and fourth quarter this year, which we feel pretty good about.
We'll go next to Richard Hill with Morgan Stanley.
Hey, guys. Just a question about maybe the financing side of the equation. One of the things that we've focused on, given the move up in LIBOR, is maybe some of your floating rate debt. I'm curious how you're thinking about that. Are you, Tom, thinking about trying to term some of that? Are you comfortable with the amount of floating rate debt at this point?
Yeah. Rich, we've got about I think 16% or 17% of our debt is floating rate debt. The bulk of that is on our line of credit. We have one small loan that's floating that comes up later this year that we may fix out. When we gave our guidance this year, we based it on the forward LIBOR curve. I think our preference is always to go long-term fixed-rate financing. Even Broadway Plaza, which was in a rising interest rate environment, we got a fairly effective coupon on that, and we saw the spread compress as rates went up. We got a little bit of benefit there. It's always our preference. I don't see a big change for us this year because we don't have a lot of maturities coming due.
It's always our preference when any of the floating rate debt does come due to put in fixed rate. We'll keep an eye on it, but I think we're comfortable with the level of floating rate debt we have right now.
That does conclude today's question and answer session. I'd like to turn the conference back to Arthur Coppola with closing or additional remarks.
All right. Thank you very much for joining us. Look forward to talking to you and meeting with you again soon. Thank you.
That does conclude today's call. Thank you for your participation. You may now disconnect.