Macerich Co

NYSE:MAC

Earnings Call Transcript 2018-Q4

[Operator]

Good day, and welcome to the Macerich Company Fourth Quarter 2018 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Jean Wood, Vice President of Investor Relations. Please go ahead.

[Jean Wood, Vice President of Investor Relations]

Thank you for joining us today on our fourth quarter 2018 earnings call. During the course of this call, we will be making certain statements that may be deemed forward-looking within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially due to a variety of risks, uncertainties and other factors. We refer you to today's press release and our SEC filings for a detailed discussion of forward-looking statements.

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

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

With that, I would like to turn the call over to Scott.

[Scott Kingsmore]

Thanks, Jean. The fourth quarter reflected generally good operating results as evidenced by the strength in most of our portfolios key operating metrics and an improvement in same center net operating income growth. As we mentioned numerous times on our last few earnings calls, the bankruptcies and early terminations in 2017 tempered growth in the first half of '18 as we worked through releasing in that space. As predicted we realized stronger operating growth in the second half of 2018. Here are some highlights for the quarter.

FFO per share was $1.09 per share, which beat our guidance and met consensus estimates. Annual FFO per share was $3.85, excluding $0.13 for activism related costs, incurred earlier during 2018. This was in line with our guidance of $3.82 to $3.87 per share. Yearend occupancy was 95.4% up 40 basis points from yearend '17 and up 30 basis points from September 30, 2018. Half of this gain of 40 basis points was temporary occupancy. Same center growth net operating income excluding lease termination revenue was up 4.2% for the quarter, or 2.4% increase when including lease term revenue. During the quarter we did realize a favorable multiyear tax appeal of one of our wholly-owned assets, which equates to roughly 150 basis point improvement to quarterly growth.

For the second half of 2018 we experienced 4% growth versus the second half of 2017 when excluding lease termination revenue and 3.4% growth including lease termination revenue. The property operating margin for 2018 improved by 60 basis points to 70.0% up from 69.4% for 2017, and REIT G&A and management company expenses collectively showed about $2.3 million improvement over a reduction during the quarter.

Now onto 2019 guidance. We have provided detailed operating guidance this morning we thought it would be useful to share a reconciliation of major components from actual 2018 FFO of $3.85 per share excluding activism versus the 2019 guidance of $3.69 per share at the midpoint, which excludes a $0.15 year-over-year reduction that we expect from the new lease accounting standard. Most of these assumptions are spelled out within the guidance table within our supplemental filing from this morning, but this should help you to get from 2018 to 2019.

One, we anticipate approximately $0.10 of accretion from year-over-year savings and corporate overhead from our 2018 reduction in force and from other G&A reductions all net of tax. Two, we expect approximately $0.12 of dilution as a result of increasing interest expense in 2019, driven primarily by increasing LIBOR and the impact of refinancings and higher rates. Three, we expect approximately $0.08 of dilution from loss rents from anchor lease terminations primarily from Sears. This is of course short-term cash flow dilution while we execute on long-term value creating opportunities within what is generally very well situated real estate. As of the end of 2018 several Sears stores have closed, but none of the Sears leases have been rejected today and we have assumed rents for only the month of January for those closed locations. Depending upon what actions are taken by Sears and by the bankruptcy judge, this assumption could prove to be conservative. Four we expect approximately $0.04 of dilution from the combination of reduced lease termination revenue, straight-lining in rents and SAS 141 income.

And then, lastly, on the disposition front, a couple of factors. One, we anticipate approximately $0.03 of dilution from the carry forward impact of 2018 dispositions on 2019. And secondly, we generated approximately $0.03 of land sale gains in 2018 but we have not forecasted any land sale gains in 2019.

Lastly, a few other notes regarding guidance. Other than Sears there have been three major bankruptcy filings so far this year and we are prudently carrying reserves in anticipation of this, and further tenant retailer fall out. This is weighing down our anticipated operating growth in 2019. We also entered into numerous new store leases and renewals upon lease expiration with a significant retailer at reduced rents. This will also lay on 2019 operating growth. This retailer generally occupies big-box locations and in line spaces greater than 10,000 square feet. We have no new acquisition or disposition activity planned within our 2019 guidance. In terms of FFO by quarter, we estimate 22% in the first quarter, 24% in the second quarter, 25% in the third quarter and the balance within the fourth quarter. And lastly, more details of the guidance are obviously included within our 8K and supplemental financial information that was reported this morning.

Onto the balance sheet, as we highlighted for you last quarter we expect to raise between 425 million to 450 million in liquidity from the company's mortgage refinancing activity during 2019. In early January, we closed on our 300 million 12 year fixed rate financing on Fashion Outlets Chicago at a fixed rate of 4.58%. This transaction yielded 100 million of incremental proceeds which we use to repay a portion of the company's line of credit. We are now close to entering into a commitment for a $220 million 10 year fixed rate financing on San Tan Village in Gilbert, Arizona, which we anticipate closing in the second quarter. This transaction would yield roughly $85 million of incremental liquidity.

We are currently marketing Chandler Fashion center in Chandler, Arizona for long-term fixed rate financing of that market dominant class A regional shopping center. And then later this year, we plan to refinance Kings Plaza. Our product continues to be very much in favor within the debt capital markets. With that I will turn it over to Doug to discuss the leasing and operating environment.

[Doug Healey, Executive Vice President, Leasing]

Thanks Scott. In the fourth quarter, sales and occupancy remained strong and leasing velocity continued. Portfolio sales ended the fourth quarter at $726 per square foot which represented a 10% increase on a year-over-year basis. Economic sales per square foot, which are weighted based on NOI were $849 per square foot and that's up from $770 per square foot a year ago. Occupancy was 95.4% and this represented a 40 basis point increase year-over-year. Trailing 12 month leasing spreads were 11.1% compared to 10.8% at September 30, 2018, and 15.2% for the year of 2017. These leasing spreads included 32 leases with rent reductions at lease expiration. Excluding these 32 rent reductions leasing spreads would have been closer to 13%.

Average rent for the portfolio was $59.09 per square foot and that's up 3.7% from $56.97 per square foot a year ago. Leasing volumes were strong, during the fourth quarter, 279 leases were executed for a total of 984,000 square feet bringing the total activity for 2018 to 825 executed leases for a total of just over 3 million square feet. Notable leases signed in the fourth quarter include Google at Westside, Nordstrom at Country Club Plaza, a flagship Tesla at Santa Monica Place, Dick's Sporting Goods at Deptford, Dave & Buster's at Vintage Fair and Crayola Experience at Chandler Fashion Center. We also had a very significant opening in the fourth quarter and that was a luxury wing at Scottsdale Fashion Square.

And we also opened a concept called brand box at Tysons Corner. Brand Box is first-of-a-kind technologically induced venue that provides flexible space for emerging brands to test bricks-and-mortar. A 10,000 square feet Brand Box opened 100% occupied with five emerging brands and one legacy brand who is looking to reinvent themselves. We are already talking to three of the brands to do a permanent long-term deal elsewhere in the center, which of course is our ultimate goal. In addition, we opened 13 emerging brands in the fourth quarter notables include Bonobos at Village of Corte Madera, Stance at Washington Square and Madison Reed and Invisalign at Broadway Plaza.

We remain active in the restaurant box categories with significant openings in the fourth quarter, including Din Tai Fung in Washington Square, Cheesecake Factory at South Plains and Tocaya Organica at Kierland, Burlington at Lakewood, 24 Hour Fitness at Pacific View and Ross at Southridge. Other key openings throughout the portfolio include Anthropologie at Chandler, Polo Outlet at Fashion Outlets of Chicago and two Hollister stores at Green Acres and Victor Valley.

Looking at our industry and leasing in particular, we remain cautiously optimistic as we focus on 2019 and beyond. The mood continues to improve, open to buys are more prevalent and brand extensions are once again being talked about. The labor market is good, gas prices are down, holiday 2018 was strong and consumers are in a spending mood. However, this does need to be somewhat tempered due to perceived economic headwinds in 2019, as well as continued store closures.

Traditional retailers that continue to reinvent themselves and focus on their product, through service, their experience, are thriving. Great examples are Apple, American Eagle, Hollister, Vans and Sephora. Boxes, restaurants, fitness, theater, entertainment, experiential and international brands are all active. Our shoppers, especially the millennials and the Gen Z's, they want it all, they want the right stores, they want food and beverage, they want aesthetics, they want to be served and they want to be entertained. And that’s exactly what we are focused on at the property level. From our store selection to the service we provide, to the experiences we create, Macerich continues to be an industry leader.

And lastly, I recently came across what I thought was a very interesting article written by the ICSE. In 2018 the ICSE commissioned an outside strategy and research firm to conduct a study to track retail web traffic and consumer brand awareness among emerging and established brands. The study is titled the halo effect how bricks impact clicks. I'm sure many of you have read this study, but for those who haven't, I would strongly encourage you to do so. In the meantime, I'd like to point out four big takeaways.

Number one, for existing retailers opening one new physical store in the market results in an average 37% increase in overall traffic to that retailer's website. Number two, increasing the number of physical stores by just 5% in a single market has significant benefit on digital engagement and web traffic. Number three, for emerging brands new store openings drive an average 45% increase in web traffic following the store opening. But the opposite is also true, web traffic drops when retailers close stores, in one retailer's case the share of web traffic across markets where they closed declined up to 77%. So in conclusion, existing retailers have incentive to expand into new markets or to expand within existing markets. Existing retailers have reasons other than cost of occupancy to keep stores open in key markets and in key shopping centers. And lastly and most importantly, it is now proven that emerging brands have all the incentives in the world to open physical stores.

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

[Tom O'Hern, Chief Executive Officer]

Thank you Doug. We had a good fourth quarter. If you look at FFO diluted it grew by 6.5% to 166 million, compared to the fourth quarter of last year. Occupancy increased 40 basis points on a year or year-over-year basis. We had good leasing volumes. But releasing spreads are low still in double digits have moderated from 2017 levels. Our malls continue to generate healthy traffic and certainly continue to generate positive sales growth and attract relevant brands and concepts.

As Doug mentioned, we continue to see the leasing tone change mostly for the positive. Legacy brands are clearly differentiated between those that continue to invest in their brand and product their in-store experience and into their omni channel strategies versus those that are struggling mainly because of the weight of historical leveraged buyouts and related balance sheet issues. While we continue to see an improved leasing environment with generally strong retail sales, we do remain concerned over certain brands.

Being able to recapture unproductive department store boxes within great malls will continue to provide significant redevelopment opportunities for us. We have two compelling recent examples of that. In Kings Plaza where we took on underproductive Sears store and replaced it with Zara, Burlington, Primark, JC Penny which collectively will do five times the sales of the prior tenant. At Scottsdale Fashion Square, we replaced the Barney's department store with Apple and Industrious.

You will see us do upgrades in other centers where we have the opportunity to recapture department stores. There is also demand for adding mixed-use including residential, hotel, entertainment, health and wellness and office components. These are compelling opportunities for us to diversify our cash flow sources over the course of the next five years.

Looking at a prime example of this as Scottsdale Fashion Square where development continues on a 80,000 square-foot exterior expansion which includes restaurants and well-recognized high end fitness club. The expansion is a 100% leased and includes tremendous collection of high-end restaurants including Nobu, Ocean 44, Farmhouse and others. Within the former Barney's location, we opened a two level flagship Apple Store which features extensive experiential and educational elements. In January two weeks ago Industrious a national co-working operator opened a 33,000 square-foot premium co-working space. It was the best opening they have ever had and far exceeded their typical opening-day occupancy.

It is expected that Apple and Industrious will generate substantially more traffic and commerce than was previously generated by the 60,000 square-foot Barney's department store box. Also at Scottsdale Fashion Square, we debuted at newly renovated and re-tenanted luxury wing with an exciting lineup of new or newly renovated retailers including Gucci, Prada, Louis Vuitton, Cartier, Breitling, Saint Laurent, Omega, St. John, Ferragamo and many more.

In addition, at Scottsdale Fashion Square we are adding a hotel. Caesar's Republic a 266 room first of its kind non-gaming Caesar's brand will be built at the center. This four star hotel will be developed by a third party on a ground lease. The hotel will be ideally located adjacent to the 80,000 square-foot expansion.

Turning now to Fashion District of Philadelphia, construction continues on a four level retail and entertainment hub standing over 800,000 square feet in the heart of downtown Philadelphia. We have signed leases or commitments from 85% of the leasable area. Notable tenants include Century 21, Burlington, H&M, Nike, Forever 21, AMC, Round1, and City Winery. At One Westside, formally known as Westside Pavilion we, along with our partner Hudson Pacific Properties recently announced that we have signed Google as the sole occupant the sole tenant to occupy approximately 600,000 square feet of Class A creative office space. The joint venture expects to invest approximately 500 million to 550 million and we expect to see 8% return on this project.

At Los Angeles premium outlets the Carson Reclamation Authority has commenced its site work to support LA's newest outlet project. This is a 50-50 joint venture with Simon Property Group to develop a 566,000 square-foot fashion outlet center with frontage along the heavily traveled I-405 freeway in Los Angeles. The project will open in two phases. The initial 400,000 square feet is currently anticipated to be delivered in the fall of 2021.

Last quarter, I shared details as to our remaining Sears stores. I'll briefly update you on the current status. We have 21 Sears stores and they are broken into different ownership groups. The first group is nine Sears stores that are owned in a 50-50 joint venture with Seritage. Six of those nine are now closed and the three remaining open appear to be part of the Sears going concern portfolio, which includes Arrowhead, Danbury and Freehold. Both Danbury and Freehold already have been 50% converted to smaller Sears footprints by virtue of leasing half the space to Primark. These nine stores are some of our best malls with average sales over $800 per foot and we have plans for all of these locations with a wide range of opportunities, including demolishing the box, and repurposing the square footage with more productive uses. At this time, although six of these are closed none of these leases have been rejected. So as of today, we do not control these locations yet.

Moving now to the second group, seven of the Sears locations are owned by Macerich and are leased to Sears for a very nominal rent. Of those seven stores four are closed and three remain open and appear to be part of the Sears going concern portfolio, including Green Acres, Stonewood and Victor Valley. Group 3 includes five Sears stores, four of which are owned by Seritage, one of which is owned by Sears. Of those five, three are closed and only Inland Center and Pacific View remain open. The outside lease rejection date is May so it could continue for a few more months before the leases are rejected. And while it is uncertain when or if we will gain control our planning and leasing efforts continue assuming that we will gain control of these boxes. As Scott mentioned, we have assumed a significant rent loss within our 2019 guidance for anchor terminations the majority of which pertains to Sears.

In closing, as we move into 2019 we are looking forward to continued progress on our redevelopment opportunities. We are encouraged by the improved leasing environment and tone, but keeping in mind that we also see retailers that are not going to make it through the year without closures, including some big names that have filed bankruptcy within the past two weeks.

And now I'd like to turn it over to the operator for questions.

[Operator]

[Operator Instructions] We will take our first question from Jim Sullivan of BTIG. Please go ahead.

[Jim Sullivan, BTIG]

Tom just curious in the prepared comments, there was a breakout of FFO by quarter which is helpful of course. But in terms of the same store NOI guide for the full year which of course, is somewhat disappointing, but we understand why you are providing it. Can you help us understand kind of how that should change over the year? Back in 2018 of course it was weaker in the first half stronger in the second. Within the overall 0.5% to 1% guide are you assuming a similar trend in '19?

[Tom O'Hern, Chief Executive Officer]

Well, part of it Jim is the comp period and as you mentioned we had softer same center in the first two quarters of '18, stronger in second half. So that would mean the second half of '19 we would be facing tougher comps. Also, it remains to be seen how quickly we will get some of these stores back. So for example the three tenants that filed bankruptcy within the last two weeks Gymboree, Charlotte Russe and Things Remembered, collectively have 90 stores with us. And we are not sure how many of those stores will close or how much rent concession will be requested by those tenants so those all could be first half of the year impacts. So Scott, unless you have a different opinion, I would say that will probably be fairly consistent through the year in terms of the same center numbers.

[Scott Kingsmore]

Yes, I would agree Tom. The biggest wildcard is the bankruptcies that are in front of us which are likely to be weighted towards the later three quarters, given the fact we are in February today Jim.

[Jim Sullivan, BTIG]

And then a quick follow up for me. On a sequential basis the sales per foot number at Biltmore was down significantly. Is that simply the result of the Apple Store move to Fashion Square?

[Doug Healey, Executive Vice President, Leasing]

Yes, Jim, it's Doug, that’s exactly right.

[Operator]

[Operator Instructions] We will now take our next question from Samir Khanal of Evercore. Please go ahead.

[Samir Khanal, Evercore]

Scott or Tom, I guess could you just maybe help us better understand the range of sort of $3.50 to $3.58 on FFO? What are some of the biggest swing factors that get you off the midpoint either to the low-end or the high end of that range? And also maybe to the extent you could maybe help us think about where consensus was wrong maybe coming into the guidance release here.

[Scott Kingsmore]

I think we mentioned a couple things in the prepared remarks that could swing either way. The timeliness of when Sears rejects leases is certainly a dictating factor. We have assumed that the lion share of our Sears portfolio stops paying rents as of February 1. So that could prove to be conservative. Obviously there is proceedings going on right now and we will see how that shakes out. We mentioned the tenant bankruptcies and dependent upon the volume of closures, and the timeliness of those proceedings that could certainly influence the range, like termination income is always one of those that's hard to pick, we provided guidance that it's estimated at 12 million, which is down from last few years, so that’s certainly a factor.

And Samir I apologize what was the second part of your question?

[Samir Khanal, Evercore]

No, I'm just trying to understand maybe where you guys were -- I'm just trying to get help in trying to figure out where you were -- why your guidance was off so much from consensus and why consensus was sort of wrong coming into the quarter. I know you guys sort of looked at all the models of the analyst. Just trying to see what was it that that we may not have picked up in the guidance.

[Scott Kingsmore]

Yes, let me touch on the few things. Obviously we have been clear about our perspective on interest rates being a headwind. So we provided succinct disclosure in terms of what those figures are. But elsewhere, obviously, same center is a surprise relative to where I know you guys modeled so that should be factored in. The anchor closures that we provided are year-over-year impacts at $0.08 of dilution in 2019, that’s going to be a factor. We obviously sold a few centers in 2018 there is going to be a carryforward dilutive impact. We commented on that that could be an area. And then I would say lastly 2019 is a relatively light year in terms of contributions from our redevelopment pipeline. We have got some accretion from projects like Philly and Kings but bear in mind that Philadelphia is a late in the year opening and there is going to be some ramp to the openings there through the mid part of 2020. Kings Plaza came online during the middle of '18 so part of the accretion from that project was felt already. And then cutting the other way we have projects such as Westside Pavilion which is obviously winding down, Paradise Valley which we continue to lease on a short-term basis to give us maximum control to redevelop that site. So some of those factors kind of cut the other way.

Lastly, bear in mind also we announced our Norstrom lease at Country Club Plaza. That comes with some repositioning of real estate and that is probably something you didn’t factor in as well. So I think in total development contributions are probably in the $0.02 range,$0.01 to $0.02 and you may have factored into your model. So those are a few highlights but I'll be glad to take it offline and do a reconciliation with you Samir.

[Samir Khanal, Evercore]

Just as a follow up. We have seen strong increases in sales but it then look like it's translated into percentage rents here. How should we think about that line item for '19?

[Tom O'Hern, Chief Executive Officer]

Well, there is very small percentage of tenants paying percentage rents. You are not going to be able to make a direct correlation. I think we are going to continue to see a trend down somewhat in 2019. Our preference is always to get base rent and fixed CAM charges rather than percentage rent. So typically as leases expire and we renew, we try to increase the base rent and with that we end up getting less percentage rent from any given tenant. I would expect that to continue.

[Operator]

We will now take our next question Craig Schmidt of Bank of America. Please go ahead.

[Craig Schmidt, Bank of America]

I was wondering how much of a drag on the same center NOI is related to the restructuring of the leases versus just vacant space?

[Scott Kingsmore]

Craig, this is Scott. We mentioned a few factors there was a significant retailer that we did upon lease expiration had probably upwards a 20 agreements that we ended up restructuring. It’s a retailer that typically occupies a bigger footprint. And those were generally not closures. They were in the most impactful instances downsizings us to enable us to reposition that real estate with retailers that we think will perform significantly better. So there is that factor. And then in terms of our estimates for potential fallout from bankruptcies for instance, there are some closures that we are aware of at this point in time as a result of going out of business sales from the retailers that have already filed. But then on top of that there is just a general estimate for what is likely to be a rent restructuring.

[Tom O'Hern, Chief Executive Officer]

So in our guidance Craig we've actually factored in an occupancy reduction during the course of 2019 of anywhere between 50 and 100 basis points.

[Craig Schmidt, Bank of America]

And then just the cadence of store closings in the malls, specialty space has been pretty active in the first six weeks of '19. Are you expecting that to maintain that? Or would it start to trail off just given the overall strength of the consumer?

[Tom O'Hern, Chief Executive Officer]

Craig typically the first quarter is bankruptcy season, they defied that a little bit in 2017 where it seemed to go up throughout the entire year. That being said, in terms of specialty tenants, 2018 was relatively light year in terms of bankruptcies and closures. But we typically see most of it in the first quarter. These three tenants that I mentioned that have filed in the last two weeks not really a surprise, surprised when they actually do it, but they both, all three of them have been on our watch list for a number of years. So the timing and the coincidence that all three filed within two weeks probably made our view of 2019 a little bit more conservative than it was even a month ago. So I would say that we do expect to see more this year. I expect it to be front end loaded. And again, that's fairly typical.

[Operator]

We will now take our next question from Todd Thomas of KeyBanc Capital Markets. Please go ahead.

[Todd Thomas, KeyBanc Capital Markets]

Just first question I guess Scott a little clarification. So you mentioned the three major chains filing bankruptcy are announcing closures in '19 to date that are embedded in the guidance plus that assumption that’s on top of that for some additional fallout. Can you just break out how much NOI loss above and beyond what's known today and what that represents in terms of the same center NOI growth forecast?

[Scott Kingsmore]

Yes, sure, Todd obviously we don’t have succinct visibility into the exact impact for any of these three, but suffice it to say that we are carrying about 100 basis points of dilution in our same center guidance as a result of all this.

[Tom O'Hern, Chief Executive Officer]

Because even though we know who has filed on those three that we've been talking about and that’s 90 stores, historically, we would see maybe 50% of those stores close 25% renegotiate the rent terms and 25% remain unchanged. At this point, we don't have the visibility into any of those three as to what the ultimate outcome is going to be.

[Todd Thomas, KeyBanc Capital Markets]

But that 100 basis point speculative cushion I guess, that includes additional activity in addition to the change that you have discussed is that correct?

[Scott Kingsmore]

That's correct Todd.

[Todd Thomas, KeyBanc Capital Markets]

And then just back to Sears, so on the anchor rent loss so I'm not mistaken, it sounded like you assumed the February 1st liquidation of Sears altogether, but there is your three major stores still open, three of the Seritage boxes are still open, so how much of the $0.08 per share dilution that’s in guidance is related to anchor rents that's already accounted for with stores that are closing how much of that is also sort of I guess speculative in nature?

[Scott Kingsmore]

Well, so, again the $0.08 assumes what's closed is rejected effectively as of today. If you were to look at the balance of the portfolio, which is probably what you're trying to get at Todd if it were to be a full liquidation declared today there is probably about a $0.015 of remaining exposure from Sears. Most of the stores that are closed today are the higher rent paying stores and with relatively rare exception what remains pays very little rent.

[Operator]

We will now take our next question from Jeremy Metz of BMO Capital Markets.

[Jeremy Metz, BMO Capital Markets]

Tom, in the fall, you talked about some opportunity to drive additional common area leasing I think it could potentially deliver upwards of 5 million a year of incremental revenue potential. Just can you give us an update on that opportunity there and how much you are factoring in into the outlook here for 2019?

[Tom O'Hern, Chief Executive Officer]

That continues to be a big focus and push for us to continue to take advantage of the common area and populate it with things that not only generate revenue but activate the common area. I think we've got maybe $0.02 a share incremental that's in there for that which is a bit less than 5 million. But hopefully it can outperform and we get closer to 5 million rather than 3 million or so that we projected.

[Jeremy Metz, BMO Capital Markets]

On the G&A front any comments on you feel about overhead cost today, you had a fair amount of savings in 2018. So is there a room for further savings there? Is that something that’s in the model?

[Tom O'Hern, Chief Executive Officer]

Yes, I think Scott mentioned that. The big positive impact of the reduction in force will be felt in 2019. In 2018, we had the reduction in the early in the year, but we also had an offsetting fairly generous severance payment to those individuals. So the real benefit will come through 2019 and that's roughly 12 million of savings.

[Jeremy Metz, BMO Capital Markets]

But does that assume any additional incremental savings or is this -- that all just a carryover?

[Tom O'Hern, Chief Executive Officer]

That’s primarily there has been additional cuts but not as significant as that. And we will continue to work on that as well.

[Operator]

We will now take our next question from Alexander Goldfarb of Sandler O'Neill. Please go ahead.

[Alexander Goldfarb, Sandler O'Neill]

Tom, just two questions. So on the first question if I hear you guys correctly because you guys had previously disclosed the overall the estimate revisions about $0.04 negative impact from Sears. So it sounds like there is now additional $0.04 to make it total $0.08. The bankruptcy is if you said it's the 100 basis points that sounds like another $0.06. The shrinking anchor I'm guessing Forever 21 but whoever that anchor is it sounds like that's an undisclosed amount. So right now I'm at $0.10 of the $0.20 delta roughly between the street and where your guidance midpoint is. So how much else is this the shrinking anchor how much is that? And then what are the other missing parts that you guys haven’t already disclosed previously that makeup sort of that $0.20 delta from the street is to where the midpoint of your guidance is?

[Tom O'Hern, Chief Executive Officer]

Well Alex, one aspect to that was the occupancy reduction we expect to see. But I don't think that had been discussed with you in terms of your model and others. Part of that is influenced by the heavy bankruptcy activity we have seen already in the first six weeks of the year. So that’s certainly an aspect of it.

[Scott Kingsmore]

I was just going to say I'll also add what I mentioned to Samir which is take a look at your underwrite for development accretion in 2019. We expect that to be probably less than what you have modeled Alexander.

[Alexander Goldfarb, Sandler O'Neill]

And then the $0.05 impact from Heitman that's not in guidance, is that something that’s going to run through FFO? So the guidance range should be effectively $0.05 lower? Or what's that footnote about?

[Scott Kingsmore]

Yes, sure the footnote is a confusing accounting pronouncement that came in into effect January 1, '18. Our interest expense Alexander is really just interest from debt. But I’d just point out in the footnote that if you are modeling those two assets which are consolidated assets and are 100% you have to factor in a deduction for our partners 50% share of those assets, which is reflected within interest expense. So it's really just meant to be a clarifying edit for you clarifying footnote to make sure you're capturing a deduction for our partners have share of those two assets.

[Alexander Goldfarb, Sandler O'Neill]

So it's not that FFO guidance is actually $0.05 lower, that’s just purely accounting.

[Scott Kingsmore]

That’s correct, purely accounting and is really meant to be a modeling footnote for you.

[Alexander Goldfarb, Sandler O'Neill]

And then if I can, on the Sears, Tom how much capital do you expect that Sears will take? And what's your split between backfilling as is versus ripping down and redeveloping?

[Tom O'Hern, Chief Executive Officer]

Right now we have got 250 million to 300 million as kind of a placeholder Alex in the development pipeline. Again, right now, we are not entirely sure which ones are going to get back. Seritage as we said six of the nine are closed. Those will be likely candidates we have got some pretty good prospects there. And I would say as we look at it today about half of those Sears boxes that we would get back would be a redeemizing exercise and half would be situations where we would knock the square footage down and repurpose that square footage elsewhere on the various sites, including some mixed use, health clubs, entertainment, potentially some offices as well, hotel. But we don't know right now as we look at guess which ones are going to get back its going to be about 50-50.

[Operator]

We will now take the next question from Christine McElroy of Citi. Please go ahead.

[Christine McElroy, Citi]

Just following up on the $0.08 of impact from anchor terminations, is all of that assumed to be driven by Sears? Are there any other anchor closures in there? And how much of that $0.08 is impacting same store NOI in terms of loss rent or co-tenancy impact? I think you exclude redevelopment from same store NOI. So, I'm presumably, the Sears boxes once they are rejected they go into the redevelopment pipeline.

[Scott Kingsmore]

Hi Christine, this is Scott. Yes, you are correct on the latter comment. The anticipated reduction of rents comes out of the same center pool. The lion's share of that $0.08 does relate to Sears. We have very little exposure for instance to Bon-Ton and their bankruptcy which occurred in roughly late summer of 2018. But there is a little bit of carryforward impact from that. But again the majority relates to Sears.

Lastly, as it relates to co-tenancy, as we have mentioned to you in the past the co-tenancy was relatively minor. To the extent there’s any impacts, so those have been reflected in our numbers. Of course those are -- there is a time delay for those so it's really relatively minimal to 2019. But that would be embedded within our same center numbers and it's already been factored in.

[Christine McElroy, Citi]

Okay, got you. So the $0.08 is largely outside of the same store.

[Scott Kingsmore]

Correct.

[Christine McElroy, Citi]

And then just following up on Alex's question just with the assumed 30 million of capitalized interest. With the Seritage JV, Sears boxes are now in the shadow pipeline. What does your cap interest forecast assume, just with regard to those Sears boxes in terms of the timing of rejection and when you start capitalizing the cost basis of the JV? Because I think that cost basis you immediately would start capitalizing the 150 million as soon as those go into the pipeline.

[Scott Kingsmore]

Yes, sure Christine. So just in terms of rough numbers, so there’s 150 million in terms of our basis, two thirds of those stores have closed so roughly two thirds of that basis we started capitalizing interest effective February 1. So when we assume the loss of rent we will assume the capitalization of interest.

[Christine McElroy, Citi]

Okay, so it's based on the closure and not on the lease rejection.

[Tom O'Hern, Chief Executive Officer]

No it would be based on lease rejection but in the guidance we had assumed that everything was going to be rejected as of February 1. So it's somewhat conservative in that regard.

[Operator]

We will now take our next question from Brian Hawthorne of RBC Capital Markets.

[Brian Hawthorne, RBC Capital Markets]

I also want to talk about some of the leasing conversations you are having. Are you guys still able to get about 2% ish of contractual rent increases?

[Doug Healey, Executive Vice President, Leasing]

It's Doug, yes, its 2% between 2% and 3%.

[Brian Hawthorne, RBC Capital Markets]

Do you get that pretty consistently? Or is it kind of tough to get?

[Doug Healey, Executive Vice President, Leasing]

No it's pretty consistent.

[Brian Hawthorne, RBC Capital Markets]

And then my other one just on tenant retention how does that look at lease expiration and has that changed at all?

[Doug Healey, Executive Vice President, Leasing]

Its Doug again, not really. The tenants that are suffering the ones that are closing stores, obviously we're not trying to retain them and given our portfolio that's 95% 96% leased we are proactively going out and trying to replace those nonperformers. So I would say that retention is in our hands and we are doing it depending on how we want to merchandise the center and with whom we want to merchandise the center with.

[Brian Hawthorne, RBC Capital Markets]

Okay, I mean I guess, so when you kind of talk about that, is that tenant retention kind of being stable I guess, I mean is that anything on a square foot basis it's stable? Or is that on a number of stores basis? I guess what I'm getting at is are your current tenants taking like downsizing?

[Doug Healey, Executive Vice President, Leasing]

Depending, some of the tenants that have a big footprint have found that they can do the same amount of business or more business in a smaller footprint. So in some instances yes they are but in other instances those that are just sort blowing it out and sales realize that they need to be a little bit bigger, so it really does depend on the retailer. But I would say right now, it's more popular to be small than it is to be larger.

[Operator]

We will now take our next question from Linda Tsai of Barclays. Please go ahead.

[Linda Tsai, Barclays]

Regarding the big box rent reductions, how is the new rent decided? Was it tied to a new occupancy cost ratio? And then in terms of the lease structure, was the term shortened? Or did they go to percentage rents?

[Scott Kingsmore]

This is Scott. So we are talking about a package of multiple stores. It's very much a give and take negotiation. In some instances we were able to capture very important new stores, new leases. When you look at the entire package, there was a select few where the retailer just had a big footprint and needed to shrink. So we effectively gained control with the ability to re-tenant that space with much more productive merchants. So that’s kind of the dynamic to paint with the broad-brush but it was very much -- there were wins as well as concessions.

[Linda Tsai, Barclays]

And just to be clear, this was for one retailer or different retailers?

[Scott Kingsmore]

One retailer.

[Linda Tsai, Barclays]

And then I think earlier H&M said they were going to close 160 stores in this year. Do you know if any of these will be in your portfolio?

[Tom O'Hern, Chief Executive Officer]

None that we are aware of.

[Doug Healey, Executive Vice President, Leasing]

Correct.

[Operator]

We will now take our next question from Jeff Donnelly of Wells Fargo. Please go ahead.

[Jeff Donnelly, Wells Fargo]

Just a first question around the new guidance I think it implies extremely tight FAD coverage of the current dividend with little incremental capacity or undertaken increase load of I think the redevelopment that you are going to be facing. I was curious what thought the board had given to reducing the dividend to retain more cash particularly in the event you face some extreme capital need in the future. I guess, in the event that were to occur whether it’s a redevelopment or for debt reduction how do you guys think about capital sources to fund any future obligations like that?

[Tom O'Hern, Chief Executive Officer]

Jeff I think Scott went through a lot of liquidity plans we have as a result of the refinancing as a result of San Tan Village and Chicago and Kings Plaza. We should see 400 million of excess proceeds, which will be temporarily used to pay down our line of credit and then used for the redevelopments. The board addressed the dividend in last quarter and we increased it very modestly, $0.01. So we have just recently addressed that. And I think our liquidity is more than enough to get us to through the redevelopment pipeline. And also as you look at this year that since our growth rate of 0.5% to 1% is not something we expect to be the new norm. If you look over the past 10 years, we have averaged same store NOI growth of 3.2%. So to me this is a low point and we would expect same center NOI and cash flow to grow at a much more robust rate as we move into 2020 and beyond. Again some of these bankruptcies that are causing the tightness in the same center are tenants that we have had on our watch list for three or four years. So in some respects the fact that they are going through their respective bankruptcies its painful short-term, but long-term it's healthy for the industry and for our portfolio.

[Jeff Donnelly, Wells Fargo]

And maybe just one last question is I'm just curious how your own vision for Macerich evolved as you move forward towards taking over leadership there. Has that maybe changed at all over the last six months? And maybe a second part to it, your predecessor retired after a 25 years stint at Macerich in his mid-60s you are not too far from that same achievement, sorry to out you, I'm just curious how do you or the board think about succession planning? I know you only took over the helm a month ago but I was just curious what your thoughts are.

[Tom O'Hern, Chief Executive Officer]

Well, a couple of things on that Jeff. I have been here for a while so we have all been part of Macerich team, Ed, myself, Scott and Doug for quite a while. So there are not going to be dramatic changes, maybe a change in the leadership style. And I will admittedly say I'm not quite as committed to some of things that Art was but directionally, I think things are very much the same.

In terms of succession and age I would venture to say I'm probably fitter than most people 20 years younger than me. And if anybody wants to challenge that give it a go including you. So I don’t think the board is too worried about my current age or physical condition. And we just went through succession. So I'm not sure that's at the top of their list right now. But that’s more a question for them.

[Brian Hawthorne, RBC Capital Markets]

I'll nominate someone to take you on.

[Scott Kingsmore]

Not me.

[Operator]

We will take our next question from Haendel St. Juste of Mizuho. Please go ahead.

[Haendel St. Juste, Mizuho]

Curious on the bottom 20% of your portfolio, thoughts on that piece today? Would you be willing to sell perhaps be a little less price sensitive? And then I'm curious as you forecasted that the NOI 50bps to 100bps what is the differential between these upper portion of your portfolio versus the lower portion?

[Tom O'Hern, Chief Executive Officer]

The lower assets really represent pretty small percentage of our NOI I'd say 5% or so. So they are not real big influencers. And there is not a ready market to just go out into the market and sell those opportunistically at a strong cap rate. From our view they are not hurting our portfolio. And to go out there and try to sell in an unwilling market doesn’t make any sense to us. So as Scott said, we have got no dispositions in our guidance as it relates to those lower tier assets. So again we whittled that portfolio down significantly over the course of the period from 2012 and 2017. We sold 25 of those centers. So we reduced that number from about 15% 20% of our portfolio to about 5%. So we are content with those right now. And they did not have a material adverse impact on that same center growth number.

[Haendel St. Juste, Mizuho]

And then I guess the question on the rent reduction. Do you think the majority of rent reductions for your problem tenants accrued this year? Or you think you will have a few more years of these reductions and to expect the similar impact next year.

[Tom O'Hern, Chief Executive Officer]

It's pretty hard to predict, as I said 2018 was relatively light other than the department stores. This year has been pretty active for the first six weeks of the month. That being said, tenant watch list is shrinking with the passage of time and there’s fewer tenants on there that we are concerned with. As I said the three that just recently filed have been on our watch list for the past three to four years. So I think 2019 impact is not something I would necessarily project to see again in 2020 or 2021.

[Haendel St. Juste, Mizuho]

And I'm going to try to sneak in one last one. Based on what you just mentioned in your prior response. I'm curious perhaps if you can elaborate on a few of the items that you are thinking versus your predecessor is a bit different about?

[Tom O'Hern, Chief Executive Officer]

Well, I'm not sure I know anybody that’s as passionate about digitally native, vertically integrated brands as Art. So I will probably spend less time on that than he did and conversely and they spend more time working with our redevelopment folks on some of the Sears boxes and what we can do there. Plus we are closer to having those in hand or under control than when Art was at the helm. But look we worked together for 24 years, as did Ed so there is not going to be any radical change in direction as a result of the change of CEO.

[Operator]

We will now take our next question from DJ Busch of Green Street Advisors. Please go ahead.

[DJ Busch, Green Street Advisors]

I just want to follow-up on Christine's questions. Scott I want to make sure I heard you correctly. So when we think about the $0.08 reduction due to the anchor move outs and I think you said that those would come out of the same store pool. So how does that work exactly? Does that mean as these anchors close the entire center at which those anchors are located are going to come out of the same center pool and will be moved to the bottom or moved in the redevelopment bucket?

[Scott Kingsmore]

No DJ, it's just a store itself. Think of Seritage's as a kind of a siloed collection of stores, granted they are attached to Macerich malls but we are just pulling out the store volume in terms of the rent contribution, not the entire mall.

[DJ Busch, Green Street Advisors]

And is it just for the Seritage stores or is that kind of the practice for other anchor vacancy as well?

[Scott Kingsmore]

Look what we are dealing with right now is a very nominal dilution from a set of approximately four stores, I think, from Bon-Ton. Very nominal, probably not even worth the words I just spilled out here. It's really Sears and we are pulling it out of same center.

[DJ Busch, Green Street Advisors]

And then maybe a follow up on Jeff's question. Just you guys addressed the liquidity. You have FOC behind you, you have the other three that sounds like they are in process. So from the liquidity standpoint I understand where you guys are going but just thinking about where leverage is today, just under 9 times, probably moving higher over the next year. When do you see that inflection point, Scott? When should we expect that levers to come back down probably to the levels we saw just even going back maybe two years?

[Tom O'Hern, Chief Executive Officer]

DJ, this is Tom. I'll have Scott check with you. I think you are maybe missing the couple of pieces in terms of net debt to EBITDA because we are close to the mid 8s and we see that moving around a little bit either both above and below that based on the timing of the redevelopments and when they come online. It will gradually start to come down. That being said, we could also, at some point in the future, do a joint venture and generate some equity and delever with that. So other than that one metric we are pretty comfortable with the rest of our balance sheet metrics both maturities schedule, interest coverage ratio, which is north of three times which is pretty healthy. We have reduced the amount of floating rate debt we’ve got. So there is a variety of things. If we do nothing it will stay between eight and nine, but it's also possible we could generate some liquidity through joint ventures and use that to pay down debt as well.

Time for one more operator.

[Operator]

We will take our final question from Tayo Okusanya of Jefferies. Please go ahead.

[Tayo Okusanya, Jefferies]

Going back to the question of your watch list. Could you talk a little bit about what else is still on to list? And the reason I asked is that in the context of your guidance the additional reserves or additional conservatism you have in your numbers around the additional store closures or rent loss apart from the retailers that have already announced bankruptcies?

[Tom O'Hern, Chief Executive Officer]

Tayo, we always maintain a watch list depending on a variety of things, tenant sales, occupancy costs as a percent of sales, the financial health of the tenant things like that. And if you look at our watchlist excluding the tenants that just filed and I'm not going to give you specific names of tenants but if we looked at all these collectively I would say there is probably 300 stores in total that are on that watchlist, and that's not an unusual number. I think over the past few years we have had anywhere from 400 to 600 stores on the watchlist. So it's actually down a bit, and the level that it's at today is not unusual. As I said 90 stores were associated with the three tenants that just filed bankruptcy. So that's recently been reduced from about 400 to 300.

[Tayo Okusanya, Jefferies]

Could you talk a little bit about just the retail categories that some of those 300 stores represent?

[Tom O'Hern, Chief Executive Officer]

It's pretty much across the board, I mean you got apparel in there, you got jewelry in there and you got some that fall in the general category, but I think the bigger categories would be apparel and jewelry.

[Tayo Okusanya, Jefferies]

And then just one more for me if you don’t mind. The hotel development with Caesar's you guys don’t have a stake in that but are they ground leasing it from Macerich, what's exactly? Is there any kind of financial interest in that project?

[Tom O'Hern, Chief Executive Officer]

Yes we are ground leasing the land to Caesar's for that hotel. So we will get …

[Tayo Okusanya, Jefferies]

How long it's going to be…

[Tom O'Hern, Chief Executive Officer]

It’s a long term I can't remember of the top of my head but it’s 20 years or more.

[Tom O'Hern, Chief Executive Officer]

So thank you for joining us today. We are excited about the opportunities in front of us. And we look forward to working with you throughout the year.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.