Macerich Co (MAC) 2018 Q3 法說會逐字稿

Good day, and welcome to the Macerich Company Third Quarter 2018 Earnings Conference Call.

Today's conference is being recorded.

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

Please go ahead.

Thank you, everyone, for joining us today on our Third Quarter 2018 Earnings Call.

During the course of this call, management may make certain statements that may be deemed forward-looking statements 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 risk, 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 so the company's website at macerich.com.

Joining us today are: Tom O'Hern, Senior Executive Vice President and Chief Financial Officer; Doug Healey, our Executive Vice President, Leasing; and Scott Kingsmore, Senior Vice President, Finance.

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

Thanks, Jean.

The third quarter reflected generally good operating results, as evidenced by the strength of most of our portfolios key metrics, including an improvement in the same-center net operating income growth.

As we mentioned several times on our last calls, the bankruptcies and early terminations in 2017 tempered our growth in the first half of 2018 as we worked through leasing out that space.

Most of that space has been re-leased by September 30, as is evidenced by our 95% occupancy rate.

We continue to see an improving leasing environment with the strong retailer sales, far fewer bankruptcies and a much more positive tone from the retail community.

Looking at results of operations for the quarter.

FFO was $0.99 per share, which compared favorably to our guidance of $0.97 and exceeded the $0.96 reported in the third quarter of last year.

Quarter-end occupancy was 95.1%, up 80 basis points from last quarter and up 80 basis points from September 30, 2017.

Same-center net operating income, including lease termination revenue, was up 3.7% for the quarter.

Excluding lease termination revenue, same-center was up 3.1%.

As we indicated on the last earnings call, we expected to see this acceleration in same-center in the second half of 2018.

We also expect the fourth quarter to exceed 3%.

The property gross operating margin improved by 80 basis points to 69.4%, up from 68.6% last year at the third quarter.

Now looking at the Sears bankruptcy and its impact on us.

We have a total of 21 Sears stores.

That is significantly less than the 40 Sears locations we had in 2012.

As a result of our disposition program over the past 6 years, we have reduced our Sears exposure by nearly 50%.

The average building size is 150,000 square feet on a parcel size that ranges from 10 to 20 acres.

The Sears bankruptcy was long expected and represents a great opportunity for us to improve our high-quality portfolio, both in terms of tenant quality, sales productivity, traffic and densification.

The redevelopment we have recently completed at Kings Plaza is a great example of that.

The Sears boxes can be categorized into 3 different ownership groups.

The first is 9 of the Sears stores are owned 50-50 in a joint venture with Seritage.

7 of those 9 are on the closure list; the other 2, Danbury and Freehold, have already been 50% converted by virtue of putting Primark in those locations.

These stores are at some of our best malls.

That group has an average sales per foot of $780 per square foot.

We have plans for all of these locations, with a range of opportunities, including demolishing the box and repurposing the square footage with more productive uses, including mixed use and densification.

In certain locations, we will be redemising the existing box and putting in more productive retail uses that will generate significantly more rent, sales and traffic than Sears provided.

The second group of stores, we have 7 locations that are owned by us and leased to Sears for a very nominal rent.

One of those locations is already closed and the others are not on the closure list and it is not clear at this time what Sears' intentions are with those stores.

These locations, if closed, will allow us the opportunity to replace the nonproductive department store box with a more productive traffic-generating use.

The last group are the stores -- the 5 stores that are not owned by us, 4 of which are owned by Seritage, 1 is owned by Sears.

One of the locations is closed and 2 of the Seritage-owned stores are on the closure list.

A number of you have asked about cotenancy issues if Sears closes all of its stores.

At 11 of our centers, we have 0 co-occupancy exposure.

At the other 10, the amount is immaterial.

In total, about $0.01 a share if all those locations closed.

Of the 16 locations that we have ownership positions in, we would estimate our pro-rata share of the capital requirements to redevelop those to be in the range of $250 million to $300 million spent over the course of the next 3 to 4 years.

Shifting now to the redevelopment-development pipeline.

At Kings Plaza in Brooklyn during the third quarter, we had the grand opening of the $100 million redevelopment.

This was a case where we captured a Sears box that was doing under $30 million in sales.

The project significantly improved the overall tenant mix of the center with the addition of Primark, JCPenney, Burlington and Zara, all of which opened in the third quarter.

Consumer traffic is up significantly and the overall shopper experience has improved dramatically.

These new retailers in total are expected to do over $100 million in annual sales.

And it's also a very significant physical transformation, and you can see the before and after photos on the cover of our supplement.

At Fashion District Philadelphia, construction continues on a 4-level retail hub spanning over 800,000 square feet in the heart of downtown Philadelphia.

We have signed leases or have commitments for tenants for over 87% of the leasable area.

Noteworthy commitments includes Century 21, Burlington, H&M, Forever 21, Colombia Sportswear, AMC Theaters, City Winery, ULTA.

We have a number of other exciting tenants we will be announcing in the near term.

The grand opening is planned for September 2019.

At Scottsdale Fashion Square, we're under construction for an 180,000 square-foot exterior expansion, including restaurants and high-end fitness club.

The expansion is 100% leased and includes Nobu and Ocean 44 restaurants, amongst others.

In addition, we have opened a new Apple store and are adding co-working space in what had been the Barney's store.

Apple held their grand opening on September 29th and the construction of the Industrious co-working Space for the balance of the former Barney's box is in process, with an anticipated first quarter of '19 opening.

We expect sales productivity for this box to be significantly higher than what we were seeing from the Barney's location.

This is another prime example of an adaptive reuse of an underperforming anchor store with vastly better traffic-generating uses.

In September, we were pleased to announce that we formed a 50-50 joint venture with the Simon Property Group to create Los Angeles Premium Outlets.

This is a tremendous site located on heavily traveled 405 Freeway in Los Angeles.

We will be codeveloping and jointly leasing this project, designed to open its first phase with 400,000 square feet, followed by an additional 166,000 square feet.

The city currently is underway with their site work, and we will commence our construction once they finish that.

The planned opening is fall of 2021.

With that, I'll turn it over to Scott to discuss the balance sheet.

Thank you, Tom.

The balance sheet continues to be in good shape.

At quarter end, the balance sheet metrics were as follows.

Debt to market cap was 48%, average debt maturity is 5.3 years and our maturities are very well-laddered by year into the future.

Interest coverage is 3.2x.

Net debt-to-EBITDA on a forward basis is 8.2x.

Remaining 2018 maturities are only $9 million at the company share.

At September 30, 2018, the weighted average interest rate was up 25 basis points to 3.89% as compared to September 30, 2017.

This is the consistent trend that we expect to continue into 2019.

In terms of our near-term financing plans, here are a few highlights.

In Q3, we have reduced our floating rate debt from 21% to 16% of our total debt by swapping $400 million of our floating rate exposure to fixed.

This 3-year swap at 2.85% effectively locks $400 million of our revolving line of credit at a fixed rate of 4.3% for 3 years through September 30, 2021.

As well, to create additional liquidity and to further reduce our floating rate debt exposure, we have planned a financing of Fashion Outlets of Chicago, which is currently encumbered by a $200 million floating rate loan.

We have arranged to refinance the property with a $300 million 12-year fixed-rate loan with a major life insurance company.

The refinance is expected to close in January 2019 and will further reduce our floating rate debt to approximately 12% of total debt.

In addition, looking forward into 2019, we have 3 highly productive centers in Kings Plaza, Chandler Fashion Center and SanTan Village, each of which are under-leveraged today and have maturities in 2019.

We would expect to see about $350 million of excess proceeds upon the refinancing of these 3 assets and then through like 2019.

Collectively, with Fashion Outlets of Chicago, we expect to raise approximately $450 million of capital in 2019 with these 4 refinancing transactions.

Now onto 2018 guidance.

As mentioned in our earnings release last night, we are narrowing the range of our previously issued earnings guidance to reflect our current expectation of results for the remainder of 2018.

The narrowed range for FFO per share, excluding costs related to shareholder activism that were recognized in the second quarter of this year, is now $3.82 per share to $3.87 per share.

The change to FFO guidance results primarily from the reduction in the same-center net operating income growth assumption for the full year from 1.5% to 2%, down to 1.2% to 1.7%.

This assumes a fourth quarter range of 3% to 3.5% of same-center net operating income growth.

This full year guidance also equates to a same center net operating income range of 2.2% to 2.7%, excluding lease termination income.

We believe that this higher range, excluding lease term income, is noteworthy and is indicative of a less disrupted and healthier occupancy environment.

You will further note that this range, excluding lease term income, differs only modestly from the prior guidance given during the prior quarter because most of the change to same-center was, frankly, caused by nearly $0.01 decline in the lease term income.

Our assumption for bad debt expense also modestly increased by $1 million as well.

Both assumptions are simply a function of having better visibility now to these forward-looking assumption than we had 3 months ago.

In gross dollars, though, $2.5 million is not a significant change to our company.

In addition, you will note that our -- we increased our interest expense guidance by approximately $1 million, primarily to account for the swap transaction that I mentioned a few minutes ago.

More details of the guidance assumptions are included in the company's Form 8-K supplemental financial information.

And with that, I will turn it over to Doug to discuss the leasing environment.

Thanks, Scott.

In the third quarter, sales remained strong and leasing velocity continued.

Portfolio sales ended the third quarter at $707 per square foot, which represented a 7.3% increase on a year-over-year basis.

Economic sales per square foot, which are weighted based on NOI, were $819 per square foot, and that's up from $770 per square foot a year ago.

Occupancy was at 95.1%, and this represented an 80 basis point increase on a year-over-year basis and from the second quarter 2018.

Trailing 12-month leasing spreads were 10.8%.

And as we mentioned on our last earnings call, in the second quarter, we had a package of 11 deals, with one particular tenant averaging 4,300 square feet.

Excluding those leases, spreads would have been closer to 14%.

Average rent for the portfolio is $59.09, that's up 4% from $56.88 as of September 30, 2017.

Leasing volumes were strong.

During the third quarter, a total of 856,000 square feet of leases were signed, bringing the total activity during the first 9 months to over 2 million square feet.

The average term for the leases signed in the third quarter was 5.4 years.

That's similar to the second quarter.

Three new flagship leases were executed this quarter: lululemon at Scottsdale Fashion Square, Anthropologie at Chandler Fashion and H&M at Danbury Fair.

Tom mentioned the opening of the new Apple flagship at Scottsdale Fashion Square, which is nothing short of incredible.

It's one of the nicest stores I've ever seen attached to a super-regional shopping center with fabulous inside and outside exposure.

It really is a must-see.

Understanding the need to differentiate, stay cutting-edge and to accommodate the demand of our shoppers, we continue to elevate our food, entertainment and experiential offerings.

As Tom mentioned, in the third quarter, we signed leases with City Winery at Fashion District Philadelphia and Nobu at Scottsdale Fashion Square.

Other recently signed leases in these categories include: The Void at Tysons Corner, Round1 Bowling at Valley River, Crayola at Chandler Fashion Center and Cheesecake Factory at South Plains.

We're already one of the Shake Shack's largest landlords and we continue to expand our relationship and are in advanced discussions on several additional locations throughout our portfolio.

Other retailers in these categories include: Two Bit Circus, Pinstripes, Dave & Buster's, Puttshack out of London, and Rec Room out of Canada, all of whom we are actively working with.

Theaters are also expanding, and we look forward to furthering our business with some of the industry leaders, such as Cinemark, CinéBistro, Bow Tie and others.

Lastly, in the experiential category, the Cayton Children's Museum is well under construction on the third level of Santa Monica Place and will open in the first quarter of 2019.

This is one of the most exciting deals we've completed in this category this year.

The museum will be the only one of its kind in all of Los Angeles and is expected to attract over 400,000 visitors per year.

This will unquestionably have significant positive effect on all tenants at Santa Monica Place, and in particular, our dining options on the third level.

We remain active with the digitally native brands, executing multiple leases, including the first-ever bricks-and-mortar store with a Eravos at Tysons Corner.

We also signed ALEX AND ANI at Cerritos, b8ta at Scottsdale Fashion Square, Bonobos at 29th Street and The Village of Corte Madera, Ruti at 29th Street, Stance at Washington Square and Madison Reed at Broadway Plaza.

Additionally, we will be opening up 4 UNTUCKit micro stores in the common areas in Vintage, Fresno, Freehold and Los Cerritos for holiday this year.

Excluding Sears, there were 5 bankruptcies totaling 16 stores in the third quarter.

Of the 5 bankruptcies, only 4 stores closed.

The bankruptcies were comprised of smaller brands with only Brookstone actually liquidating.

Year-to-date non-anchor closures totaled only 16 stores and that compares to 92 closures in 2017.

This is the slowest closure pace we've seen since 2012.

Sears filed for bankruptcy, as Tom mentioned, on October 15, 2018, and this bankruptcy has long been anticipated.

And we've been actively working on redevelopment plans for all of our Sears locations.

So in conclusion, our leasing metrics remain solid and the level of bankruptcies is significantly lower.

We continue to focus not only on our traditional retailers, but also those in the entertainment, experiential and digital sectors.

And most importantly, in terms of the leasing environment, we believe the tone and the sentiment are definitely showing signs of improvement.

And with that, we'll open it up to Q&A.

(Operator Instructions) We will take our next question from Jim Sullivan of BTIG.

Tom, I think, when you were -- in your prepared comments, you talked about the capital requirement of retenanting vacated anchors, and you gave a number of $250 million to $300 million.

And I wasn't clear exactly how many boxes that related to, number one.

And kind of second part of that question, can you tell us, of those boxes, how many are simply going to be a straightforward replacement of one anchor with another anchor as opposed to kind of a reconstructing of the space into smaller stores that might generate perhaps significantly higher income?

Look, Jim, it's going to be a combination of things.

That number really relates to the top 2 categories that I had mentioned first, the 9 locations we have with Seritage, and then also including the several locations that we own.

The exact detail is to be determined.

That's just an estimate.

Some will merely be a redimising of the existing box, but some of our best opportunities will those -- some of the Seritage properties where we've got the ability to demolish the building and repurpose that square footage elsewhere, likely in mixed-use and things other than retail.

We will take our next question...

Do you have a follow-up to that, Jim?

Operator...

Sorry.

Tom, am I on?

Yes, Jim.

Yes.

Okay.

So the second part of the question would be, and it may be too early to give us a number, but for that incremental investment, the $250 million to $300 million, is there a range of yield that you would anticipate as you underwrite these?

Too early to put that out there, Jim.

I mean, typically, you've seen our yields range from 6% to 10%, but it's too early to be specific in this -- on this package.

We will take our discretion from Craig Schmidt of Bank of America.

I just wanted to talk about the strong same -- strong sales growth.

Is it possible to get a comfortable number in the fourth quarter?

Or is it tougher comps that may lower that?

And then just given this strong sales performance, do you think we'll see a widening of leasing spreads?

Craig, we typically don't try to predict where sales are going to be.

It's obviously been strong the last 4 or 5 quarters and there's no reason to think that won't be.

In fact, it was interesting to note that last week, Moody's boosted their retail outlook for -- to positive for the first time in 3 years, and they are expecting it will be a strong holiday season.

So who knows?

We're not going to speculate on that.

In terms of the leasing spreads, and Doug, you can elaborate further, I think we had somewhat of a negative impact as a result of signing 11 renewal deals on some fairly large spaces that weighed on that stat.

So I think it is possible to see it move back as we move forward closer to what we've been reporting over the last few quarters in the mid-teens, exclusive of second quarter.

Yes.

And I think, Tom, I mentioned, if it weren't for one particular tenant, that we signed 11 deals within the second quarter, the spreads would have been closer to 14%.

We will now take our next question from Jeremy Metz from BMO capital markets.

So Tom, you mentioned the potential additional Sears spend here.

You have Philly and Scottsdale ongoing, a bit of capital.

You all still contributing at Westside.

You have the new venture with Simon.

You guys did lay out some expectations for proceeds that you expect to get out of Kings, Chandler, Chicago and a few others.

And as we think about your sources and uses and your average today at over 8x, how should we think about that trending?

And what sort of target range do you want to get back down to?

And what's the timing expectation to do so?

Right.

So Jeremy, the projects you mentioned really stretch out all the way to 2021.

And even when you include Sears in the mix, we're probably talking about $200 million to $250 million spend per year.

We'll also have the benefit -- I think when you refer to the balance sheet, you're probably talking about the single metric of debt-to-EBITDA.

And we'll also have the benefit of Kings Plaza EBITDA in our numbers for full year next year.

Philly will start to come online next year as will as Scottsdale Fashion Square.

So we'll have some benefit of the additional EBITDA coming in.

Today on those projects, we've just got the related debt without any EBITDA.

So we'll get a benefit there that will move -- would actually move it down a little bit.

But if you take a look at an average compounded annual growth rate for us on same-center sales and you move that forward from today into 2021 and you look at these projects and you look at the timing of when the EBITDA from the construction projects runs in, we should actually see a slight decline as a result of all these projects and the natural growth we would expect out of our portfolio going forward.

So if it's at a forward rate of 8.3 debt-to-EBITDA today, you could see that bouncing around a little bit, but eventually moving below 8.

And you've been more active on selling some noncore assets.

Is that at all part of the plan as you look forward here?

No, we've gone through periods of time since 2012 when we've sold a lot of noncore assets.

Recently, we announced that we'd sold a couple of power centers, which were carryovers from the Westcor acquisition in 2002.

But that being said, we don't have any dispositions in our guidance.

I think we're ready to focus on the portfolio we have in driving same-center NOI growth and EBITDA growth.

So I wouldn't expect too many dispositions from us in the near future, if any.

We will now take our next question from Christine McElroy from Citi.

Just with regard to the 7 Sears stores on the closure list that you have in the Seritage JV.

Were these negotiated to close pre-bankruptcy?

So did you have to pay anything to get the leases back and gain control of the space?

Or were these just naturally rejected?

Well, Christy, they're -- they've been put on a closure list.

There hasn't been a formal rejection yet.

So that's -- it's in the hands of the Bankruptcy Court.

It seems like that's a natural place for it to end up, but it's to be determined at this point.

Okay, got you.

So in terms of being rejected, in terms of any consideration that you might have to pay to gain control of the leasehold, that's still up in the air.

Typically, there wouldn't be any, but it is up in the air.

Okay.

And then just in terms of the L.A. Outlet project, is your contribution of land part of the pro-rata cost consideration in the 50-50 JV?

And can you discuss sort of the split of responsibilities at Simon as you build out that project?

Yes, Christy.

This is kind of a unique site.

It had been a former landfill, and so there's some environmental issues there that are going to be monitored.

The city is going to continue to own the land.

And what we have, along with our partner, are air rights to build above that.

So the city's going through doing what they have to do on the site work and on-site and off-site work in remediation.

And then once they've done that, they'll deliver that to us and we have air rights above that.

And then in terms of responsibilities, I mean, we're just going to co-lease it, we're going to codevelop it.

I think they're going to do the marketing, we'll do the day-to-day property management.

So it really is pretty close to a 50-50 split on responsibilities as well.

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

Just a question for Doug on leasing.

Given the improvements that we've seen in retail here more recently, is it safe to assume that based on current conditions, we shouldn't see any additional relief or package lease sales like you had in the second quarter?

Or are tenants still coming to you with those requests?

Todd, I think that's more property-specific.

But in general, I would say that, given the climate and given what's happened in the past, those should be fewer than we've seen in the past, going forward.

Okay.

And question looking at Kierland Commons, that took a pretty big step up in sales.

I know there's been some retenanting there, but curious if you could speak to what drove the big increase this quarter.

Yes.

This is Scott.

So we've recently added a Tesla to the project, and so that's causing some increases.

Kierland's always operated a very healthy growth clip independent of that, but I think Tesla is probably one of the catalysts for that.

Got it.

And just last question on the lease accounting changes that will be implemented in January.

I think there were some debate over -- or how they would be sort of allocated or how they would hit the P&L.

Is there any additional clarity around that?

Yes, Todd, subsequent to last quarter's call, I've had conversations with a variety of people, and I think what seems to be the most desired thing to have us do is to put it in there with G&A as a separate line item so people can keep track of it separately and not include it with property-level expenses.

Okay.

So the majority of it, we should expect to hit G&A.

Well, it'll have -- we'll put it below G&A on the income statement, then we'll just label it leasing expenses.

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

So it sounds like we've got a question and a follow-up, is what it sounds like.

So the first question is, I realize it's getting towards year-end and probably more thoughts around 2019, but just going to the same-store guidance reduction this year, you guys reduced the lease term income that you expected on your second quarter call and the lease term income that you're expecting now was pretty much the same that you' revised down to last time.

So what is the driver of the change in the NOI guidance for this year, ex lease term, if last quarter, you forecast $15 million for the year.

This quarter, you're forecasting $14 million.

I mean, does $1 million make that much of a difference, a 50 basis point difference?

Or is there something else going on in the reduction?

Yes, Alexander.

This is Scott.

I'll go ahead and take that one.

So as I mentioned in my opening remarks, the gross dollar change as a result of the change in same-center is really not that material.

It's $2.5 million.

It's comprised of nearly $0.01 of termination income decline.

It's a reassessment of where we stand today relative to our bad debt exposure, and we bumped that up $1 million.

So it's about $2.5 million.

That simply drives the same-center metric, including termination fees, down 30 basis points.

So it doesn't take a lot of movement in terms of basis points to drive a very small dollar result.

So just keep it in mind that it's not that consequential, but...

And I think what's really relevant here is the acceleration of same-center.

I mean, people get hung up because what effectively is a 5 basis point shift in same-center growth, excluding term fees.

Term fees are down.

That's always a guess.

We had term fees of $21 million in '16, $22 million in '17, I think that's what we used as our guesstimate for '18, and we've trimmed that over the course of the year.

But we have seen the acceleration in same-center in the third quarter.

We've told you we think it's going to be north of 3% in the fourth quarter.

And if you exclude lease term fees, it's even higher than that.

So that's the real story there.

That minor reduction is pretty immaterial.

Okay.

And the second one is on the new Simon JV for L.A. Premium Outlets.

Does this mean a potential revisitation of Candlestick?

And perhaps you and Simon would JV on Candlestick premium?

I mean, certainly, we are open to doing other joint ventures with them.

We've been joint venture partners going back years ago when we did the IBM portfolio together.

I mean, what we're really focused on today is the Carson project.

And it doesn't mean there won't be others in the future, but right now, that's what we're focused on as partners.

We will now take our next question from Linda Tsai from Barclays.

How does the Apple at Scottsdale differ from the one at Broadway Plaza?

From the last call, you noted that the Broadway Plaza has the new Apple format, does Scottsdale, too?

The -- Linda, it's Doug.

The Apple at Scottsdale is a true flagship.

It's 15,000 square feet, whereas the one at Broadway is smaller than that and it sits alone.

So I guess, the real answer is Scottsdale is their flagship.

And their flagships are very few and far between.

Linda, hopefully you'll be joining us for the tour of Broadway Plaza next week, and you take a look at that store, which is also a great store.

Great-looking, relatively unique, in the shape of an iPhone.

Wow.

Yes, I'll be there and I look forward to it.

The occupancy for your group 4 and 5 malls were up quite a bit, up 110 bps and 240 bps, respectively.

Can you talk a little bit about what drove that?

And if you expect these increases to continue?

Yes.

I think a lot of it is we're finally getting some leasing momentum with the legacy retailers.

I mean, a lot of the emerging brands and digitally native retailers don't focus on that group of assets.

But we have seen additional leasing happening the last couple of quarters with the legacy retailers, and that's helped to benefit those assets in particular.

And then the $1 million increase in bad debt expense for guidance, was that due to the 5 bankruptcies in 3Q you referred to earlier?

And then overall, do you expect bad debt expense to be down year-over-year in '19?

Yes, Linda.

This is Scott.

I'm not sure that we can point to any one specific instance that gave rise of the increase, $5 million to $6 million, it's -- we look at it holistically across the portfolio each and every quarter.

So it's a lot of small numbers that end up aggregating.

And as you get more clarity as you go through the year, sometimes, you need to adjust up or down.

I think...

[It's been] consistent year-over-year.

Yes.

I think you'll find we operate in the $5 million to $6 million band.

You have to go back to 2014, it was $5 million; 2015, $5.4 million; 2016, $4.5 million; 2017, $5.8 million.

This year, we've got it in at $6 million.

So it will probably move a little bit, Linda.

I mean, we're not giving guidance on '19 yet.

My guess is it would move them, but not significantly.

We will now take our next question from Wes Golladay of RBC Capital Markets.

I just wanted to go back to the retail sales environment.

It definitely seems to be improving.

I just want to know if it's broad-based, if you can maybe comment on how the bottom end of your tenants are doing, call it, the ones that have a 20%-plus occupancy cost.

How does that list compare versus maybe a year ago?

Yes.

It's Doug.

The mood is definitely changing.

And by way of example, 18 to 24 months ago, we meet with retailers all the time, and the conversations revolved around traffic being down in the malls and online shopping killing the mall business.

But fast forward 18, 24 months, we're still having the same conversation.

But these conversations are much different.

They're more about -- the tenants are talking about their product and we're talking about the services they're providing.

They're talking about their experience.

They're talking about their marketing and their social media and their influencers.

So I think they took -- the successful retailers, the ones that are performing today, took the last couple of years to really reinvent themselves, to figure out to revise shopping patterns and to figure out new customer, which is the millennial and the Gen Z. And in doing so, they're performing much better.

I think those that haven't evolved, that haven't focused on the product, that haven't focused on service or experience, are the ones you're talking about probably in the bottom 20 percentile.

But I think that discrepancy is becoming higher and higher to the better.

We'll now take our next question from Samir Khanal from Evercore.

I know you haven't provided guidance for '19, but can you just help us walk -- help us through how to think about sort of capitalized interest for '19?

And maybe the impact sort of interest expense as we kind of formulate our views for next year?

Yes, Samir.

Scott here.

I think you would find that as we look at '17 to '18, capitalized interest was relatively consistent.

As our weighted average interest rate ticks up, which we do expect that to continue into '19, you'll find a slight increase that correlates with capitalized interest.

I think the big wildcard here is the pace at which the Sears stores come back to us.

Bear in mind that once those stores do come back, we will be putting into play the redevelopment plans that we have on the shelf ready to go.

And once we do that, we will be capitalizing interest on any cost or basis associated with those stores.

So that's probably the wild card.

It's hard to estimate at this point in time, given the uncertainty as to when those stores will be coming back.

But it's more than likely that we'll see a tick up in that line item associated with Sears.

Okay.

And I guess as a follow-up and even on the termination fee, which is also sort of a wild card, but it sounds like you think environment sort of feels better.

I mean, is it fair to assume that, that number sort of stays the same?

Or even could come down slightly from where you are this year?

Yes, sure, Samir.

If look at our history, we probably have a floor that I would peg at around $10 million or so.

So if we're at $14 million today, $10 million tomorrow and occupancy environment appears to be healthier, I would say it's probably realistic that we'll finish somewhere in between there.

Again, obviously, not giving guidance to 2019, but that's probably a realistic assumption, that we land somewhere in between those 2 numbers in 2019.

We will now take our next question from Michael Mueller of JPMorgan.

Tom, I was wondering, what were some of the biggest factors that prompted you to bring Simon into the Carson City development?

I mean, you obviously did Chicago on your own, and that's doing $800 a foot.

Mike, yes.

It's a variety of things, They're the biggest in the outlet business.

They're a great partner.

We have a long history with them.

It's a big project.

We haven't put the dollars out there yet, but it's going to be well over 400,000 square feet.

So it's safe to say the total cost is going to be well over $400 million.

So share in the capital is a positive.

It's an environmentally challenged site.

But we just think the benefit of both firms working on that project together, bringing our best efforts and our best people, it's going to have a great outcome.

So that's why we did the -- made the decision.

And also recall, Michael, we did Chicago.

We did have a partner at that time.

We ultimately bought them out, but we did have a partner, 50-50 partner at the time.

And we'll take our next question from Tayo Okusanya of Jefferies.

Along those same lines of questioning, should we be taking this as a sign that as you look at -- as we look going forward, you guys definitely want to be a bigger player in the outlet business?

Look, Tayo, we've said for years that we're not going to do a lot of these.

It's going to be really urban locations and unique locations.

We're not going to really try to go out there and make it 20% of our business or probably even 10% of our businesses as it relates to NOI.

But when we can find a unique location like Chicago or Los Angeles, this is a tremendous piece of real estate.

It's on the 405 Freeway, just south of the 110 Freeway.

There's about 300,000 cars go by in a day, usually very, very slowly because it's bumper-to-bumper in Los Angeles 24/7.

And it's a great location.

So L.A. is underserved as it relates to the outlet business, and we think it's a great location, we think it's a great partner and it's going to be a tremendous project.

That's helpful.

And then in regards to merchandising mix, could you talk a little bit about that?

I mean, our understanding is that there might be radius restrictions at the outlet.

I'm not sure radius restrictions are going to be a real big issue for us.

It's quite a distance from the Citadel, and the next-closest outlet centers or about 50 miles away, and that could be 2 hours in L.A. traffic.

One Cabazon to the south and Camarillo to the north.

So we don't really think that's going to be a major problem for us.

We will now take our next question from Caitlin Burrows of Goldman Sachs.

You guys have consistently reported pretty strong sales growth, but it seems like market rents have kind of plateaued and occupancy cost is now the lowest it's been since, like, 2012.

So I was just wondering, are the occupancy cost retailers are willing to pay lower than before?

Or do you think it has to do with the mix of the types of tenants you're working with?

Or do you think kind of market rents and occupancy expense -- sorry, occupancy costs will go back up some?

Well, I think it's a function of tenant sales growth has outpaced the rent bumps.

So we're back in that situation, which is actually very favorable.

We think we're going to continue to be able to -- in our leasing efforts, to push rate, to try to move that occupancy cost as a percentage of sales higher.

But I think it's really -- mathematically, really a function of the tenants growing at a 7% pace, and the rent's not moving up that fast.

Okay, got it.

And then maybe just on the Scottsdale Fashion Square redevelopment.

Could you give us more details on the timing there?

It just seems like, with the series of upgrades that you're doing, how long you'll expect that to take to reach the stabilized yield?

Go ahead, Scott.

Yes, Caitlin, this is Scott.

So again, this is a multi-phased project, right?

So as we repurposed the Barney's box, Apple's open, we just mentioned that.

Industrious will be opening their co-working facility of approximately 35,000 square feet in January, I believe, Doug?

Correct?

Yes.

We will expect the peripheral tenants on the 80,000 square-foot expansion of the outside to start to open in fall of 2019, but frankly, that will continue on the way through the end of 2019.

There may be an opening that spills into '20, so it's going to be relatively well distributed throughout 2019.

You just mentioned the fall of '18, like now?

Or you mean the fall of '19?

I'm sorry.

Fall of '19.

I'm a year off.

Okay.

So they will start opening in fall, like, a year from now.

But it will continue taking longer than that.

Yes.

So let me clarify, Caitlin.

We've got a pad, a significant restaurant use that I think will resonate great in the market.

That will open in fall of '18[2019].

The balance of the exterior tenants, these still will really be sprinkled throughout '19, probably clustered towards fall of '19.

That's correct, Scott.

And as you mentioned earlier, it will trickle into the beginning of 2020.

We will now take our next question from Rich Hill of Morgan Stanley.

I wanted to go back to your prepared remarks and maybe ask a couple of questions about the micro-pop-ups in the common areas.

I was hoping you could maybe share a little bit about how rents compare relative to in-line space, maybe how much of an uplift that's providing to total NOI.

And then finally, do you expect to make it -- these more permanent?

It's Doug.

Yes, I think that's the goal.

The micro-stores are obviously smaller.

We're talking about UNTUCKit in the common area.

They won't have quite the amount of merchandise, but they will have just enough merchandise and the right merchandise, given the market, to really test the market in the mall.

So our goal and our hope is that they perform well, with our longer-term intent to make them permanent.

Got it.

So maybe more of an incubator than a real uplift to immediate NOI.

Is that sort of the way we should be thinking about it?

That's fair.

Okay.

Great, guys.

And then just one more question.

It looked like overage rents were maybe up a little bit more than we were expecting.

I recognize 3Q '18 is seasonal, but is the higher than, at least we were expecting, over rent -- overage rents reflective of the improving sales environment that you spoke of?

And do you sort of expect overage rents to continue to trend higher on a quarter-over-quarter basis?

Yes, Rich.

This is Scott.

I think that we would expect it to be relatively consistent.

I think we've mentioned in the past that percentage rent is a difficult one to determine.

If you're doing your job right, you're rolling percentage rent into fixed minimum rent.

And so you'll see a natural migration as you roll over leases to more fixed-rent based structures.

But on occasion, you'll have gross deals where tenants pay percent of sales, and it's really somewhat hard to predict.

It's hard to correlate.

Bottom line is it's hard to correlate 7% sales growth with percentage rent because not every tenant that is driving that sales growth is actually paying overage rent.

So generally, I don't think you can underwrite anything about the sales trends into the future.

I don't see it as a declining revenue source.

It's frankly, not a significant one.

I think I'd underwrite it as relatively flat, inconsistent.

We will now take our next question from Jim Sullivan of BTIG.

Sure.

Tom, maybe I'm going to take another swing at this same issue that I asked you about initially earlier in the call.

And let me just start by kind of making a statement that Macerich is not alone in stating that they have plans, developed plans, for Sears boxes.

And as we all know, this is something that has been a long time coming.

And particularly in Macerich's case, you have -- you're getting back boxes which are in some of the most productive centers in the country.

And I would've thought those plans that you guys have developed, you've developed in consultation with prospective tenants.

So I guess, I'm a little bit disappointed that there is a -- well, a lack of definition as to how many of these boxes are going to be -- go to new anchors that will be added to the centers, that have wanted to get in for a long time and didn't have space available versus how many of the boxes can be redeveloped at a much higher cost, but theoretically, a much higher return when you bring in a variety of smaller tenants.

So maybe if you could just address.

I'm just trying to find out how specific are these plans?

And on the cost side, just how thoroughly detailed and prepped are you on that $250 million to $300 million number?

Jim, we're very specific on the plans.

What we're not as clear on is when we're going to get these assets back, because even the Seritage -- the 7 Seritage assets that are on the closure list, that doesn't necessarily mean those leases will be rejected.

So until we know the ultimate outcome, we're not going to get too specific on exactly what we're going to do.

We know exactly what we're going to do.

Our partner knows exactly what we're going to do.

Most of these are joint ventures, be it with Seritage or others.

But we're very specific, but it would be inappropriate to be putting forth return hurdles at this point until we actually have control of those boxes.

Okay.

And then kind of a follow-up on that question.

As you've identified, that's only for a segment of the current 21 Sears boxes that you have.

If we were to be very simplistic, if Sears would liquidate and move toward closing all of their stores by the middle of next year, should we simplistically assume that, that the $250 million to $300 million number gets doubled?

No, I wouldn't assume that.

I wouldn't assume.

That's our pro rata share.

That touches every single Sears in the first 2 groups.

What is not included by that, Jim, is the 5 locations that are owned by either Seritage or Sears.

We don't know the outcome of those.

It's going to depend on the price, whether we're interested in buying those boxes or not.

Okay.

So Seritage would be interested in selling their interest in those boxes.

This is not the joint venture assets we have with them, but there's 5 others.

I understand.

[Inland Center], Pacific View, [Superstition Springs] and I think [Desert Sky].

It appears there are no further questions.

Well, thank you, everyone.

We appreciate you joining us today on this call.

We look forward to seeing many of you next week in San Francisco at NAREIT.

Thank you.

That concludes today's call, and you may now disconnect.