Macerich Co

NYSE:MAC

Earnings Call Transcript 2019-Q1

[Operator]

Good day, everyone. And welcome to the Macerich Company First Quarter 2019 Earnings Conference. Today's conference is being recorded. Additionally, today's call will be limited to one hour.

At this time, it's my pleasure to turn the conference over to Jean Wood, Vice President of Investor Relations. Jean?

[Jean Wood, VP, IR]

Thank you, Lori. Thank you all for joining us on our first quarter 2019 earnings call.

During the course of this call, we will be making certain statements that may be deemed forward looking within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially due to a variety of risks, uncertainties and other factors. We refer you to today's press release and our SEC filings for a detailed discussion of forward-looking statements.

Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included in the earnings release and supplemental filed on Form 8-K with the SEC and posted in the Investor section of the company's website at macerich.com.

Joining us today are Tom O’Hern, Chief Executive Officer; Scott Kingsmore, Executive VP and Chief Financial Officer; and Doug Healey, Executive Vice President, Leasing.

With that, I will turn the call over to Scott.

[Scott Kingsmore, EVP and CFO]

Thank you, Jean.

The first quarter reflected good operating results. Sales productivity and leasing activity remained strong, and we experienced healthy year-over-year occupancy increases, all of which Doug will elaborate on, later during the call. As we expected, there were numerous bankruptcy filings within the first few months of 2019, which was factored into the guidance we issued three months ago.

Here are some highlights for the quarter. FFO per share was $0.81, which beat our guidance and consensus estimates by $0.01. Same-center growth in net operating income was 1.7% for the quarter, which does exceed our 0.5% to 1% same-center NOI guidance for 2019. Margins continued to show improvements. The EBITDA margin for the quarter improved by 140 basis points to 61.7%, up from 60.3% for Q1 2018. REIT, G&A and management company expenses collectively showed $17 million of reduction during the quarter. This resulted primarily from nearly $13 million of onetime severance costs incurred in Q1 '18 from the reduction in force we undertook in early 2018. In addition, we realized recurring comparative savings and compensation costs from that reduction in force and also from reductions in executive compensation.

Savings in corporate overhead were offset by various line items, including primarily the following. One, a $6 million increase in interest expense versus Q1 2018. As a side note, this excludes the non-FFO impacts of the accounting pronouncement on Chandler Freehold. This $6 million was driven by both interest rate increases as well as by increased interest expense on long-term fixed-rate financings. Two, a $5.2 million increase in leasing expenses versus Q1 2018, which was driven primarily by the new lease accounting standard. Three, a decrease in noncash revenue from straight-lining of rent and SFAS 141 of $2 million versus the first quarter of '18. And lastly, a decrease in lease termination revenue of a little over $2 million versus Q1 '18, which we know can be very lumpy in nature.

With respect to 2019 earnings guidance, at this time, we're reaffirming our guidance for both FFO per share diluted and for same-center net operating income, and we direct you to the company's Form 8-K supplemental financial information for more details on the company's guidance assumptions.

Regarding our financing activity, the following summarizes the current status of our 2019 plans.

In January, as we previously mentioned to you, we did close on a $300 million, 12-year, fixed-rate financing on Fashion Outlets of Chicago at a fixed rate of 4.58%. This transaction yielded $100 million of incremental proceeds, which were used to repay a portion of the company's revolving line of credit.

We have entered into a commitment for a $220 million, 10-year, fixed-rate financing on SanTan Village in Gilbert, Arizona, at the fixed rate of 4.3%. That transaction is expected to close in the second quarter and is expected to generate approximately $84 million of incremental liquidity and Macerich's share.

We plan to soon enter into a commitment for a $256 million, 5-year, fixed-rate financing on Chandler Fashion Center in Chandler, Arizona, with an expectation to lock rate at 4.1% approximately and a late second quarter closing.

Our joint venture in One Westside is currently sourcing construction financing proposals, which are expected to fully finance ownership's remaining incremental cost to deliver the redevelopment of this creative office campus to Google.

We are in market now to source financing opportunities on the recently developed office and residential components of Tysons Corner, both of which are currently unencumbered. And then lastly, as we previously mentioned to you, by year-end, we anticipate a very significant refinance of Kings Plaza, our recently redeveloped, market-dominant, Class A regional center in Brooklyn.

Collectively, this set of financings are anticipated to generate approximately $600 million of liquidity to the company.

Now, I will turn it over to Doug to discuss the leasing and operating environment.

[Doug Healey, EVP, Leasing]

Thanks, Scott.

In the first quarter, sales and occupancy remained strong and leasing velocity continued. Portfolio sales ended the first quarter at $746 per square foot, which represented an 8.7% increase on a year-over-year basis. Economic sales per square foot, which are weighted based on NOI, were $869 per square foot, and that's up 8.6% from $800 per square foot a year ago. Quarter-end occupancy was 94.7%. This represents a 70 basis point increase versus a year ago and a 70 basis point decline as compared to year-end 2018 occupancy of 95.4%. This decline is due to typical seasonality in the business between Q4 and Q1 as well as a store closures from the early 2019 bankruptcies.

Trailing 12-month leasing spreads were 11%, which is consistent with 11.1% at year-end 2018.

Average rent for the portfolio was $60.74 per square foot, and that's up 3.9% from $58.44 per square foot 1 year ago.

Leasing volumes were extremely strong in the first quarter. During the quarter, 258 leases were executed for a total of 825,000 square feet. This represents 64% more leases and 51% more square feet compared to the same centers in first quarter 2018.

The large-format space remains active. We signed 2 leases with Round One, 1 at Fashion District of Philadelphia and 1 at Deptford Mall. In addition, we signed a 2-level, 23,000 square foot H&M at The Oaks as well as ULTA and Ross at Superstition Springs. We also executed multiple deals with emerging brands, including Peloton at The Oaks and in Washington Square, Casper at Tysons Corner and Washington Square, UNTUCKit at The Village at Corte Madera, Indochino at Santa Monica Place, Morphe at Tysons Corner and Ring at Scottsdale Fashion Square.

Other notable leases signed in the first quarter include our second deal with Industrious and 33,000 square feet of second-level space at Broadway Plaza; Hollister at Fashion District of Philadelphia; Sandbox, a virtual-reality concept at Cerritos; Pedals & Pints, a local craft brewery at The Oaks; and Altar'd State at Washington Square. In addition, we opened 37 new tenants in the first quarter which totaled 130,000 square feet.

We're especially pleased with the opening of our first coworking unit, Industrious, at Scottsdale Fashion Square. Industrious built a stunning space and has already exceeded 90% occupancy within the first few months of opening, which is well ahead of their plan. We feel their users will be a perfect fit for Scottsdale and definitely accretive to Scottsdale's already powerful shopper base. Other exciting openings include 2 ALEX AND ANI stores at Cerritos and Santa Monica Place; EQ3, a Winnipeg-based furniture store at North Bridge; a flagship Lululemon and new Gucci store at Scottsdale along with Bonobos at 29th Street.

Looking at our industry and leasing in particular, even with the recently announced closures from early 2019 bankruptcies, we remain bullish on retail in both the Class A mall sector and in bricks-and-mortar stores. We recognize the first quarter had its share of store closure announcements. But we also recognize those announcing store closures had several things in common: one, their balance sheets were overleveraged, preventing them from reinvesting in their brand and their business in order to keep them relevant; two, there's no focus on customer service; and three, there's no focus on providing any kind of in-store experience. So as a result, these retailers became obsolete.

We do believe it's noteworthy that 407,000 square feet of the 2019 bankruptcies within our portfolio, 85% of that volume is concentrated within only 4 brands. These brands have long struggled. Most have previously filed bankruptcy and now find themselves without choices other than to close all or a majority of their store fleet. And this isn't a revelation to us or to the industry. So again, we weren't surprised by these closures and in fact anticipated most of them as most have been on our watch list for years.

Unlike the media, we prefer to focus on the positive things happening in our industry, the things you don't readily read about or hear about. For example, Apple, Lululemon, VF Corp., Abercrombie & Fitch, American Eagle and many other retailers continue to reinvent themselves and are thriving. In fact, American Eagle is opening 30 to 40 new stand-alone Aerie stores this year. Abercrombie & Fitch is once again opening kids stores.

The luxury and cosmetic categories remained strong, led by LOUIS VUITTON, Gucci, Sephora and ULTA Cosmetics. Entertainment, food and beverage and coworking are on fire. JD Sports out of London recently bought a Finish Line and is aggressively looking to open stores, both in malls and on high streets. Levi Strauss had a very successful IPO in March and is now actively looking to open stores. And it's my understanding that a few more retailers may go public by the end of the year.

So, these are just a few of the examples of the positive things that are happening in the industry, and we look forward to capitalizing on these opportunities and many others as they continue to present themselves in the future.

And with that, I'll turn it over to Tom.

[Tom O’Hern, CEO]

Thank you, Doug.

We had a very solid first quarter with good operating metrics, including FFO at $0.81 per share, exceeding our guidance and consensus estimates. Same-center NOI growth was 1.7%. Portfolio productivity continued to improve with the portfolio now performing at $746 per foot, up 8% from a year ago, and occupancy was nearly 95%, also up significantly from a year ago.

As you could tell from Doug's comments on the leasing environment, it's very strong. It's as strong as it's been in years. We had very high leasing volumes in the first quarter, up over 50% compared to the first quarter of last year. And the tenant quality keeps improving as we replace stale, underperforming, small-format apparel tenants with entertainment, dining, lifestyle and fitness uses as well as online retailers expanding their business into brick-and-mortar locations. Our redevelopment pipeline continues to progress well, including our prospects for the replacement of the Sears stores that have now closed. We are very excited about the progress at redevelopments at Scottsdale Fashion Square, Fashion District of Philadelphia, One Westside and Los Angeles Premium Outlets. The opportunity to capture and replace unproductive department store boxes within our great malls provides us with a unique generational opportunity to elevate the value, productivity and attractiveness of our better-quality real estate.

Our recent replacement of Sears at Kings Plaza with Primark, Zara, JCPenney and Burlington as well as the replacement of Barney's at Scottsdale Fashion Square with Apple and Industrious are 2 prime examples of significantly enhancing the productivity and traffic compared to underperforming department store boxes.

Looking specifically at our redevelopment pipeline. At Scottsdale, the development continues on the 80,000 square foot exterior expansion, which is now 100% leased and includes a tremendous collection of high-end and lifestyle restaurants including Nobu, Ocean 44, Farmhouse as well as an Equinox fitness club. The majority of the restaurants will open by holiday 2019; Equinox will open in spring of 2021.

Within the former Barney's location, Apple and Industrious are now open. Industrious opened in January to a company-best 75% opening day occupancy, and they are now well ahead of plan with an occupancy level of over 90%. These 2 tenants have significantly elevated consumer traffic and productivity within this formerly challenged wing that was anchored by an underperforming department store, which in turn has generated leases with, among others, a flagship Lululemon, Peloton, UNTUCKit, L'Occitane and Capital One Café. This is exactly the type of follow-on leasing energy we anticipated while we replace a department store box with a high-quality tenant.

The newly renovated and re-tenanted luxury wing will continue to add new stores throughout the year and includes an exciting lineup of new -- or newly renovated luxury retailers including Gucci, Prada, LOUIS VUITTON, Cartier, Breitling, Saint Laurent, Omega, Ferragamo, Jimmy Choo and more. Also, there's a deal signed for a new Caesars Republic hotel, which is scheduled to open in 2021.

Moving on to Fashion District of Philadelphia. Construction continues on this 4-level retail and entertainment hub that spans over 800,000 square feet in the heart of downtown Philadelphia. The project will provide the city with the most concentrated critical mass of retail, taking advantage of mass transit that feeds directly into the concourse level of the project. At this point, the shell building is essentially complete, and tenant construction is work is underway. We have signed leases or in active lease negotiation with tenants for over 85% of the leasable area. Noteworthy commitments include Century 21, Burlington, H&M, Nike, Forever 21, AMC Theatre, Round One and City Winery.

At One Westside, formally known as Westside Pavilion, along with our 75% partner, Hudson Pacific, who recently announced that we've signed a Google lease as the sole occupant that will become the tenant for 584,000 square feet of Class A creative office space. The joint venture expects to invest an incremental $360 million to $400 million at an 8% return. We anticipate that the venture will close on a loan facility, which will fully fund the remaining cost to be incurred on this project.

The Carson Reclamation Authority continues its horizontal site work to support the Los Angeles Premium Outlets. That's our 50-50 joint venture with the Simon Property Group. We expect to commence vertical construction of phase 1 totaling 400,000 square feet in early 2020 with a planned opening in fall 2021.

Now for an update on Sears. We had a total of 21 Sears stores broken into 3 different ownership groups. Group 1 is our 50-50 partnership with Seritage and includes 9 stores in some of our top centers. The average sales per foot in these centers is over $800 per foot, and it represents some of the best situated Sears parcels in our portfolio. Only 2 of the 9 stores are expected to remain open, at Danbury and Freehold, each of which have already been converted into a smaller-format Sears with the upper level of each box leased to Primark. Of the remaining 7 locations, we expect Arrowhead Towne Center to close within the coming months, and the other 6 locations are already closed. And at this time, we anticipate these 7 leases will be rejected in mid-May. We have very specific plans for the 7 locations where we expect to have leases rejected and will be discussing them in more detail once we have control of the stores.

Group 2 consist of 7 Sears locations that are owned by Macerich and are leased to Sears for a very nominal rent. Of those 7 stores, 4 are closed and 3 will remain open, including Green Acres, Stonewood and Victor Valley. We're actively exploring various alternatives for redeveloping those 4 locations and assume that those leases will also be rejected in mid-May. The third group consists of 5 Sears stores. 4 of those are owned by Seritage, 1 is owned by Sears. Of those 5 stores, 3 are closed, and Inland Center and Pacific View stores will remain open and are on the Sears going forward list.

So, in summary, of our 21 Sears locations, 7 will remain open, and we expect lease rejections on 11 locations. And we also expect the 3 stores owned by Sears and Seritage will remain closed. We anticipate in total spending $250 million to $300 million of incremental capital at this time to redevelop the Sears boxes. That could vary depending on the scope of these projects as well as the underlying ownership structure. The redevelopments are expected to be completed starting in 2020 and run through 2024.

So, in closing, I'd like to say the improved quality of our portfolio achieved through noncore asset dispositions, redevelopment and replacement of unproductive tenants with exciting new and diversified uses has positioned us well for the coming years. As we progress through 2019, we are very enthused about the continued progress on our redevelopment opportunities. While we continue to face some short-term occupancy disruption from several bankruptcies that occurred to start the year, we remain firm in our belief that in the long run, our high-quality assets situated in dense urban markets will thrive as the retail landscape continues to evolve.

Now, I will turn it over to the operator to open it up for Q&A.

[Operator]

[Operator Instructions] And we'll go first to Samir Khanal.

[Samir Khanal, Evercore]

Scott or Tom, it seems like after you provided guidance on the same-store front we had some resolution at Sears, right. So it sounded like they're going to be open a bit longer. And you did kind of the 1.7% in the quarter for same-store, but your guidance is still 75 base at the midpoint. Can you maybe walk us through kind of the swing factors or the plus and minus to get you to kind of the low end or the high end of guidance at this time?

[Scott Kingsmore, EVP and CFO]

Sure. Samir, I'll touch on a few of those points. The -- so we did anticipate that Sears -- within our guidance, that Sears would pay rent through January. We mentioned that 3 months ago. And in fact, they're going to stay open roughly a quarter extra. Bear in mind, though, that from a bottom line standpoint, once those projects, are placed into development, we'll be capitalizing interest on the basis. So the cash rent accretion that we would get from an extra quarter of rent from Sears will be offset by capitalized interest. So that factors into the FFO thinking. Also, bear in mind that the accretion from Sears that we would get from extra quarter is carved out of our same center. It is not included in same center. So that's one thing to note. And then I would just say just overall in terms of our guidance, when we came into the year, we anticipated that these bankruptcies would occur.

Again, as Doug mentioned, none of this was a surprise to us. What we didn't know at the time was exactly how the complexion of those bankruptcies would roll out. And in other words, while -- as we look a couple years ago where bankruptcies were somewhat of a mix between assumptions as is, assumptions with lease modifications and some closures, what we've now realized is that this year, of the 400,000 square feet or so that has now filed, roughly 85% of that volume has resulted in store closures and liquidations.

So what we are actively doing now is backfilling that space. And in fact, we backfilled approximately 55% of that space to date. But of that 55%, we're only replacing roughly 1/3 of the rent that we had lost. So in a nutshell, we continue to backfill, but largely that's due to a temporary tenancy on a short-term basis, which, bear in mind, our temporary tenants pay roughly 1/3 of the rent that a market rent-paying tenant would be on a long-term basis. So as we look at the year, yes, we started off the year well at 1.7%, but we still have a lot of work to do and we're going to wait to see how the year unfolds. And at this point in time, we do feel comfortable affirming our 0.5% to 1% same-center NOI growth.

[Samir Khanal, Evercore]

And I guess just as a follow-up or just sort of switching gears here, I know, Tom, you talked about potentially doing a joint venture and using proceeds to lower leverage. But -- so it's probably a bit too early, but are you able to at least provide any color or any kind of early indications of pricing or interest at this point?

[Tom O’Hern, CEO]

Yes. Samir, it's a little early to conclude on that front. We are considering doing a joint venture, as we mentioned on the last call, and it would be -- they're 1 or 2 of our top 20 assets. So we think it would be earnings neutral, and we're evaluating that potential right now. It could end up raising between $500 million to $800 million of equity that we would plan to use to pay down debt.

[Operator]

And we'll go next to Craig Schmidt at Bank of America.

[Craig Schmidt, Bank of America]

Is your JV done with the entitlements and zoning efforts at the Los Angeles Premium Outlets?

[Tom O’Hern, CEO]

Yes.

[Craig Schmidt, Bank of America]

Okay.

[Tom O’Hern, CEO]

Yes. It's concluded. And we're in the planning phases right now.

[Craig Schmidt, Bank of America]

Okay. And then just maybe if you could comment on the restaurant commitments or dining commitments at Fashion District at Philadelphia.

[Doug Healey, EVP, Leasing]

We had commitments, Craig, from City Winery, Yard House. And then there's a cluster food court tenants, if you will. I will say, though, given the fact that we've announced AMC and that we recently announced Round One, 2 entertainment components, the interest from the restaurants has become much more significant. So probably more to report in the future.

[Operator]

We'll go next to Alexander Goldfarb at Sandler O'Neill.

[Alexander Goldfarb, Sandler O'Neill]

Tom, just going back -- for my first question, going back to your comments on the JVs that you said that the -- whatever it was, $500 million to $800 million will be used for debt paydown. As we think about Sears, you guys are spending sort of gross $140 million to redo the Barney's so that the Sears -- the budget of $250 million to $300 million sounds like that will go up. But obviously, it's over time. So can you just walk through how you're thinking about funding all the Sears redevelopments? And then also, would you consider the dividend as a source of capital to help put more money and to help fund the Sears redevelopments?

[Tom O’Hern, CEO]

Sure, Alex. So the Sears could take a variety of structures. To the extent we knocked down the Sears building and do multifamily, for example, we will most likely bring in a multifamily developer who would take a share of the project. So that -- the size of that capital commitment is fluid. It could change either direction. But in terms of funding it, we've got quite a bit of liquidity from refinancing, as Scott outlined, 5 or 6 deals near term where we're going to generate in excess of $600 million. So the concern is not liquidity. As we mentioned, we're considering doing a JV. That would reduce our leverage level. But liquidity is not the issue. Once those refinancings are done, our line of credit will be under $400 million. And it's a $2 billion line of credit, so there's a lot of capacity there. So our preference would be to do a joint venture. At this time, we're not considering any change to the dividend.

[Alexander Goldfarb, Sandler O'Neill]

Okay. And then on the guidance, and maybe it's just in the wording, but it looks like you guys are now expecting higher leasing impact, $0.24, for this year versus before it was $0.18. Maybe it's the wording, but it just looks like that element has gone up. So I don't know, maybe that's offset, because Sears is staying a quarter longer. So maybe the 2 net out, which is why guidance didn't change. But can you just walk through that?

[Scott Kingsmore, EVP and CFO]

Yes. Sure Alex. It really is wording. You'll note that the guidance still reflects that the year-over-year impact between '18 and '19 is still anticipated to be $23 million or $0.15. Our prior disclosures represented a leasing cost net of leasing commission income, and that was for both '18 and '19. As we rolled into the year and we started to disclose exactly what the first quarter would look like, we realized that it's probably more appropriate to show those leasing expenses at gross. And so that's why you see the change within the guidance footnotes. But just to be clear, there are no changes to our estimates of leasing expenses. It's simply a change to our guidance disclosures at this point.

[Operator]

We'll go next to Jim Sullivan at BTIG.

[Jim Sullivan, BTIG]

Couple of questions regarding the sales productivity number. There was a pretty impressive gain in the sales per foot, and I'm assuming that Tesla was a factor. Do you have the sales comp excluding the Tesla impact?

[Tom O’Hern, CEO]

Jim, we don't have that, and we typically don't disclose something like that on a tenant by tenant basis. But obviously, Tesla has a positive impact. And we have 6 Teslas in our portfolio that report sales, and they're all in the top 10 group. So when you see some of the big increases that occurred in those top 10 tenants, you should look at our supplement, Page 14. And quite a few of those have a Tesla there. So that was a positive factor. Apple's a positive factor. But there are a lot of others in there as well.

[Jim Sullivan, BTIG]

So just kind of a follow-up on the impacts of that. If Tesla and Apple are factors, should we assume that the revenue-to-sales ratio or the occupancy cost is likely to decline over time or stay a little bit lower than it has been over time, which was the case, I think, in the fourth quarter and again here in the first quarter?

[Tom O’Hern, CEO]

That's a factor, both of those tenants.

[Operator]

And moving next to Christy McElroy at Citi.

[Christy McElroy, Citi]

Appreciate you breaking out the bad debt line in the supplemental. I'm wondering, just because bad debt was up year-over-year, what impact that had on the same-store NOI growth. And then also, you had mentioned earlier in the call that there was some year-over-year margin improvement. I'm wondering the sort of -- how all these factors impacted same-store being above the full year range. I know that bad debt would have been an offset, but just the margin part.

[Scott Kingsmore, EVP and CFO]

Sure. Christy, this is Scott. Yes, bad debt was up, I believe, $700,000 quarter-over-quarter. That was really driven by pre-petition rent write-offs for the bankruptcies. That would have had a dilutive impact on same center. I'd estimate that at roughly 30 to 35 basis points of dilutive impact in the quarter. So certainly, that does factor in. We did talk about margins. We've specifically focused on EBITDA margins. So bad debts would certainly cut against that. Obviously, some of the savings in our reduction in force as well as our savings in executive compensation were also contributing factors to the increase in our EBITDA margins.

[Christy McElroy, Citi]

Okay. So, it's more corporate-level margins as opposed to property profit margins?

[Scott Kingsmore, EVP and CFO]

Our property margins did increase by, I want to say, 20 to 25 basis points. Our EBITDA margins had even greater growth given the overhead savings, correct.

[Christy McElroy, Citi]

Okay. And then, just, it looks like the occupancy rate at Queens dropped quarter-over-quarter. What was behind that?

[Scott Kingsmore, EVP and CFO]

Sure. We had one large tenant that we are repositioning and downsizing. And so that was a reduction of, I think, roughly 20,000 square feet that caused that change in occupancy.

Operator

And we'll go next to the Linda Tsai at Barclays.

[Linda Tsai, Barclays]

Tom, on the last call, you highlighted Macerich's SC NOI growth of 3.2% over the last 10 years. And currently, bankruptcies are weighing on that typical growth. Since you're reaffirming the 50 bps to 100 bps guidance for this year, what sort of growth would you expect in 2020? Closer to that of 2019 or closer to your historical range?

[Tom O’Hern, CEO]

Linda, we're not quite ready to give guidance for next year, but let me speak to that directionally. When we came into this year, we said this was going to be a transitional year. We had visibility into Gymboree and Charlotte Russe, Things Remembered. And we expected that to weigh on the occupancy level and same-center growth for the year. But as we move through this year, based on what Doug is seeing in the leasing environment and what we're seeing throughout our portfolio, I think we're going to get back to more historical levels as we move into 2020 and beyond.

[Linda Tsai, Barclays]

And then you've spoken about the Simon L.A. outlet project several times including today, but it's still not in the development schedule in the supplemental. Is that because it's too early to provide a preliminary development cost estimate?

[Tom O’Hern, CEO]

Yes. We're still refining the scope of the work there. And I would imagine that sometime within the next quarter or so, it will probably show up in the development pipeline report.

[Operator]

We'll take our next question today from Todd Thomas at KeyBanc Capital Markets. Sir?

[Todd Thomas, KeyBanc Capital Markets]

First question, just following up on Tesla. Tom, you said 6 report sales. How many Teslas do not report sales? And then I think you had at least one more lease signed or pending leases in the pipeline, including one, I believe, at Santa Monica Place. Just given Tesla's comments around stores more recently, I'm just curious if those are still moving forward and whether any have closed or are closing in the portfolio.

[Tom O’Hern, CEO]

We have a total of 7 that are open today, Todd. So 6 of the 7 report sales. And then we have a lease signed right on 3rd Street as you enter Santa Monica Place. That was a recent signing, and we expect them to open in the fall. So at this point, they've got great locations in some of our best centers, and they're doing quite well. And to our knowledge, none of those are going to close. Is it possible we'll lose one? Yes, it's certainly possible, but I doubt any more than one.

[Todd Thomas, KeyBanc Capital Markets]

Okay. And then I had a question on the food and restaurant as a category. We saw Kona Grill file this week. And I know there's been a big push to add more food in recent years. Can you just talk about the performance of that category over the last few years as the focus on foods increase? And can you comment specifically on turnover trends and CapEx and the economics of those deals in general?

[Tom O’Hern, CEO]

Yes. I mean there continues to be good demand. I mean the restaurant business is such that there's always going to be concepts that fail or get stale, Kona being no exception. But there's a lot of other exciting restaurants that we have available. They're expensive deals, but they typically are better than average return on cost. And you can see from the announcement on Scottsdale Fashion Square with Farmhouse, Ocean 44 and Nobu. Those are some great higher-end restaurants that should do quite well at Scottsdale Fashion Square. I would say, and jump in here, Doug, but it seems that there is more choice than we've ever had as it relates to the food and beverage category.

[Doug Healey, EVP, Leasing]

Yes. That's true, Tom, and especially when it comes to the traditional mall restaurant sector. That's extremely right -- active right now. Cheesecake is doing deals. Darden is doing deals. BJ's brewhouse is opening up stories. Shake Shack clearly is opening up stores. True Food Kitchen, same. So as the Konas of the world go away because they've become somewhat irrelevant, I think there's still a nice pipeline to follow it up.

[Todd Thomas, KeyBanc Capital Markets]

And can you comment on sales transfer for some of those that have -- that are in the portfolio, have been in the portfolio in the same-store or comp pool?

[Tom O’Hern, CEO]

Most are trending up. A good example is Cheesecake Factory at Scottsdale Fashion Square on the third level. But their sales continue to go up every year. And I think that's a pretty good barometer for the rest of the category in our portfolio.

[Operator]

Our next question today is from Caitlin Burrows at Goldman Sachs.

[Caitlin Burrows, Goldman Sachs]

I have 2, call it, reporting questions. I guess first, on guidance. In the first quarter, you recognized the $6.3 million loss on sale or write-down of assets that impacted net income and EPS but then was offset in the FFO calculation, as expected. But then when I look at your FFO guidance page in the supplement, it doesn't show this offset in the full year number. So I was just wondering why that is. Is it just that you didn't revise the net income part this quarter or some other reasons?

[Scott Kingsmore, EVP and CFO]

Yes. Caitlin, you're correct. We just did not revise the net income portion. I mean that will get rolled in. Our focus primarily was on our FFO line item guidance. At this point, we just confirm that across the board. The impairments were nothing unusual, as you saw. In the first quarter of 2018, we had significant impairments as well, and GAAP requires us to periodically assess carrying value on a depreciable basis. It requires you to mark down that basis, but it certainly doesn't allow you to recognize appreciation basis. So that's just part of our routine quarterly closing, and I don't think there's anything unusual there.

[Caitlin Burrows, Goldman Sachs]

Okay. Makes sense. And then second on the bad debt topic. The earnings release shows your income statement for 1Q '19 and reclassified various 1Q '18 amounts to correspond. But if I look at the 1Q '18 total revenues, it shows $236.7 million, which is the same as you did report in 1Q '18. So I'm just wondering if the bad debt piece was always inside of revenues. Or how does the reclassification happen but that 2018 number not change?

[Scott Kingsmore, EVP and CFO]

I'm very impressed by your question given that you only had a few hours to digest. So great job. Very good question. So the accounting literature provides that bad debt, whatever you want to call it, uncollectible accounts, they all have different nomenclature, effective January '19 will be treated as a contra revenue. But in 2018, it's still recognized as shopping center expense and is not a contra revenue. So there is a distinction between 2018 and 2019 reporting.

[Caitlin Burrows, Goldman Sachs]

Okay. So the total revenue shown in that table is not exactly like-for-like to the 2019 number…

[Scott Kingsmore, EVP and CFO]

Correct, due to bad debt.

[Operator]

And we'll go next to Jeff Donnelly at Wells Fargo.

[Jeff Donnelly, Wells Fargo]

Just a quick question. The average base rent that's in place at Macerich has been growing faster the last several years than the average base rent you've been signing. And the gap actually has been widening in favor of the in-place base rent, so I guess -- which kind of implies that your core growth has sort of held up even though initial rents might have not. I guess I'm just curious, I mean, we're all well aware of the challenges that are out there in the retail market. But as it relates to leasing, have you guys been able to hold on to rent bumps in the leases that you're signing? I'm just -- I guess that's really ultimately what my question is. What are you getting out of your retailers' intra-lease? Has that been fairly resilient?

[Doug Healey, EVP, Leasing]

Jeff, it's Doug. Yes. The answer to that is yes. Regardless of any fallout as we replace and continue to renew, we maintain all of our increases internally.

[Operator]

Our next question today is from Jeremy Metz from BMO Capital Markets.

[Jeremy Metz, BMO Capital Markets]

Just two quick ones here. Tom, you commented about the potential JVs in the works as a means of raising capital. But any thoughts on additional outright sales? Is there anything there that you're considering?

[Tom O’Hern, CEO]

No. We went through a period of time where we sold noncore and we've whittle that number down. Just less than 5% of our total NOI is reflected on the insurance on Page 14 and 15 of the supplement. So we think we're good there. In terms of an outright sale, our preference is a JV. We also think, generally speaking, for A-quality malls there's a bigger pool of buyers for a JV interest than a whole -- 100% interest because then they've got to go out and find an operator typically. So we think there's pretty good demand, and that's frankly something we've done many times in our history. We did it in 2009. We did it in 2015 and 2016. So really, we're focused on the JV rather than an outright sale.

[Jeremy Metz, BMO Capital Markets]

And does that demand for an operating partner, therefore, help offset any change someone would pay for an outright purchase?

[Tom O’Hern, CEO]

Well, I haven't done a lot of transactions, so it's a little tough to tell. We have seen some JVs done recently. We know there's good institutional demand there from domestic as well as sovereign funds. So I think we've seen more examples of joint ventures transacting than we have outright sales. And there's some fees involved. But generally, we do these deals 50-50 or 49-51, something like that, and we would expect that to be the case here.

[Jeremy Metz, BMO Capital Markets]

Got it. Second one from me. Of the 3 Seritage boxes that are owned and closed, are you in discussions with them to partner on the redevelopment or re-leasing of those? Or do you just have more than enough to deal with that at this point?

[Tom O’Hern, CEO]

Well, those assets are of lower quality than the assets that are in the Seritage JV. So that's really where we're going to focus our initial attention. And it remains to be seen if there'll be more to discuss with them on the 3 boxes that they own and have closed. But really for us, the focus is where the biggest investment potential is, and that's on the 7 JV -- Seritage JV assets that we expect to be rejected here in the next month.

[Operator]

We'll go next to Nick Yulico at Scotiabank.

[Greg McGinniss, Scotiabank]

This is Greg McGinniss on for Nick. So it's -- actually, it's kind of a 2 part on the Sears redevelopment. First, Tom, regarding that 2020 and 2024 time frame you mentioned for the Sears redevelopments, is that based on waiting to start some of the redevelopments or just how long do you expect a potential construction to make. And is there any concern that if you wait to start some of the redevelopments, the empty anchor might be detrimental to mall performance?

[Tom O’Hern, CEO]

Well, there's a couple of things there, Greg, and I mentioned it when I was talking about Sears. In some cases, we will demolish the Sears building, and we'll change the use. We envision a few of these where we would put a hotel or potentially multifamily. And that'll take some entitlement time, typically 18 months, something like that. So those are the projects that would be further out on the time line. In other cases where we're just going through a re-tenanting exercise, we could expect to get that done within 12 months. So that really is -- in terms of worried about Sears being closed, they haven't been a fantastic draw the last 10 years or so. Look at what we did at Kings Plaza and how much energy and traffic picked up as a result of replacing a Sears box with Zara and Primark and Burlington. And we'd expect that in most cases. So we don't think it's a big negative that there's a dark Sears box. But the prospects of redeveloping and adding different types of uses is really a generational opportunity for us and something we've been waiting for, for a while now.

[Greg McGinniss, Scotiabank]

Okay. And a follow-up. There's the change in the footnote that now talks about including consideration from your JV partners on a potential investment size for the Sears. Should we take that to mean Seritage may not be as willing to invest in transformative redevelopment opportunities, that you may have been alone, or how should we be thinking about that?

[Tom O’Hern, CEO]

No. As we consider things like mixed-use, multifamily for example, we may bring in a partner, an additional partner that's got multifamily expertise.

[Greg McGinniss, Scotiabank]

So, that wasn't necessarily a Seritage related comment, but a potential other JV partner?

[Tom O’Hern, CEO]

Correct.

[Operator]

We'll move next to Ki Bin Kim at SunTrust.

[Ki Bin Kim, SunTrust]

Going back to the sales per square foot commentary, are you able to provide like what the median sales per square foot trends have been and maybe which categories are doing better than others?

[Tom O’Hern, CEO]

We don't put a median number out there in terms of the types of tenants. The categories that have been doing well, footwear's been doing well. Food and beverage has done well. They're probably the 2 main categories and the general category, of course, where you include Tesla and Apple has done very well.

[Ki Bin Kim, SunTrust]

So I guess from a trend-wide standpoint, is it far off from like the average reporting number, the median or just if the general direction is similar.

[Tom O’Hern, CEO]

I don't have the median here in front of me. We can get back to you on that, Ki Bin.

[Ki Bin Kim, SunTrust]

Okay. And just next question on Fashion District. You're about 4 months away from opening. 85% leased, If I do the math from the outside looking in, but I would imagine if you excluded some of the anchors that have been in place, the in-line leasing is probably lower, much lower than 85%. How has the progress for this center been compared to some other projects? And is there -- are you at all concerned about just the leasing trajectory?

[Doug Healey, EVP, Leasing]

It's Doug. No. This project really has evolved over time. What once started out as a pure outlet play has changed, and I think there's a few reasons for that. One, we announced AMC, and that led to much more entertainment, much more food and beverage. A lot of these retailers that have been looking at Philadelphia for quite some time to do a flagship have found Market Street to be the place they want to be. So now we've got a couple of flagship stores opening up on Market Street. So between the theater, the entertainment, the outlet, the anchors, we've got a lot of traction. And that 85% number is a real number, and we look forward to the opening in September.

[Operator]

And next we'll go to Tayo Okusanya at Jefferies.

[Tayo Okusanya, Jefferies]

I'm trying to reconcile some of your comments about the retail outlook versus some of your peers. We're still kind of talking about some risk of some other retailers going bankrupt or at least closing a meaningful amount of stores. So I'm just kind of curious if you could talk a little bit about your watch list and kind of what you're seeing out there.

[Tom O’Hern, CEO]

Yes. Tayo, we saw this kind of cycle of bankruptcies starting at the beginning of 2016, and we had a fairly significant watch list as we headed into 2016. And if you'll recall, we were fairly cautious as we went into 2016 and probably more so than others in the A-quality mall sector. And as we've moved through the bankruptcies of '16 and '17, which were record years, virtually every one of those bankruptcies is on our watch list. As we moved into 2018, it was lighter. And then moving into 2019 with Gymboree and Charlotte Russe, those tenants have been on our watch list for years, as Doug mentioned in his comments. So no surprises there, and our watch list has shrunk considerably from even a year ago. So that's cause for optimism on the leasing front as well as the leasing activity and the ability to replace that space pretty quickly. And Doug, I'll let you elaborate on that.

[Doug Healey, EVP, Leasing]

Yes. I mean, the leasing environment right now is good and it continues to improve. In my opening remarks, by way of examples, whether it's Apple or Lululemon or Abercrombie & Fitch, American Eagle, these guys are all opening stores. They've got significant open-to-buys. They're coming out with brand concepts. So that's the traditional side. But I think the real key here is that we've got an opportunity to reset as we merchandise our centers. So as we start to lose some apparel, it gives us the opportunity to take traditional mall with traditional apparel stores and really turn them into town centers that are something for everybody. So as we look to re-merchandise, as we look to reset, these malls are becoming great places for some boxes and theaters and entertainments and restaurants and fitness. Experiential retailers right now are extremely popular as are the DMVBs and the international component. And as we recently talked about, co-working will become very popular. So as we continue to lose some tenants that may not be relevant these days through bankruptcies, our ability to replace from a traditional standpoint and from a new category standpoint gives us optimism.

[Operator]

And we'll take our last question today from Michael Mueller at JP Morgan.

[Michael Mueller, JP Morgan]

Just a quick one. What's been the average duration on the leases signed this year? And how has that trended compared to recent years?

[Tom O’Hern, CEO]

I think it's fairly consistent at six years. It's been remarkably resilient at that level for about the last 5 years, and we haven't really seen much of a change in that.

[Michael Mueller, JP Morgan]

Got it. Okay. That was it. Thank you.

[Tom O’Hern, CEO]

Thanks, Mike. Well, thanks everyone for joining us today. We look forward to seeing many of you at ICSC this month or at NAREIT in June.

[Operator]

And once again, that does conclude today's conference. And again, I'd like to thank everyone for joining us today.