Macerich Co (MAC) 2018 Q4 法說會逐字稿

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.

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.

Thanks, Jean.

The fourth quarter reflected generally good operating results as evidenced by the strength in most of our portfolio's key operating metrics and an improvement in same center net operating income growth.

As we mentioned numerous times in our last few earnings calls, the bankruptcies and early terminations in 2017 tempered growth in the first half of '18 as we work through re-leasing 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.

Year-end occupancy was 95.4%, up 40 basis points from year-end '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 a 2.4% increase when including lease term revenue.

During the quarter, we did realize a favorable multiyear tax appeal at one of our wholly owned assets, which equates to roughly 150 basis point improvement of 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 a $2.3 million improvement or a reduction during the quarter.

Now on to 2019 guidance.

While 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 in 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 lost rents from incurred 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 of rents and SFAS 141 income.

And then, lastly, on the disposition front, a couple factors: One, we anticipate approximately $0.03 of dilution from the carryforward impact of 2018 dispositions on 2019; and secondly, we've 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 3 major bankruptcy filings so far this year, and we are prudently carrying reserves in anticipation of this and further tenant retailer fallout.

This is weighing down our anticipated operating growth in 2019.

We also entered into numerous store leases -- new store leases and renewals upon lease expiration with a significant retailer at reduced rents.

This will also weigh on 2019 operating growth.

This retailer generally occupies big-box locations and inline 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 8-K supplemental financial information that was reported this morning.

On to 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 a $300 million 12-year fixed rate financing on Fashion Outlets of Chicago at a fixed rate of 4.58%.

This transaction yielded $100 million of incremental proceeds, which were used to repay a portion of the company's line of credit.

We are now close to entering into a commitment for a $220 million 10-year fixed rate financing on SanTan 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 a 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.

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 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 the luxury wing at Scottsdale Fashion Square.

And we also opened a concept called BrandBox at Tysons Corner.

BrandBox is a first of a kind, technologically induced venue that provides flexible space for emerging brands to test bricks-and-mortar.

At 10,000 square feet, BrandBox opened 100% occupied with 5 emerging brands and 1 legacy brand who is looking to reinvent themselves.

We're already talking to 3 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 at 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 at 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, their 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 Zs, 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're 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 ICSC.

In 2018, the ICSC commissioned an outside strategy and research firm to conduct a study that 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 the study, but for those who haven't, I would strongly encourage you to do so.

In the meantime, I'd like to point out 4 big takeaways: #1, for existing retailers, opening one new physical store in a market results in an average 37% increase in overall traffic to that retailer's website; #2, increasing the number of physical stores by just 5% in a single market has significant benefit on digital engagement and Web traffic; #3, for emerging brands, new store openings drive an average 45% increase in Web traffic following a store opening; but the opposite is also true.

Web traffic drops when retailers close stores.

In 1 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 incentive in the world to open physical stores.

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

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-over-year basis.

We had good leasing volumes, but re-leasing spreads, although 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 to attract relative 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 leverage 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 2 compelling recent examples of that.

In Kings Plaza, where we took an underproductive Sears store and replaced it with Zara, Burlington, Primark, JCPenney, which collectively will be 5x 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 with other centers where we have the opportunity to recapture department stores.

There's 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 5 years.

Looking at a prime example of this is Scottsdale Fashion Square where development continues on an 80,000 square foot exterior expansion, which includes restaurants and a well-recognized high-end fitness club.

The expansion is 100% leased and includes a tremendous collection of high-end restaurants, including Nobu, Ocean 44, Farmhouse and others.

Within the former Barney's location, we opened a 2-level flagship Apple Store, which features extensive experiential and educational elements.

In January, 2 weeks ago, Industrious, a national co-working operator, opened a 33,000 square foot premium co-working space.

It was the best opening they've ever had and far exceeded their typical opening-day occupancy.

It is expected that Apple and Industrious will generate substantially more traffic in commerce than was previously generated by the 60,000 square foot Barney's Department Store box.

Also at Scottsdale Fashion Square, we debuted a 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're 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 4-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 4-level retail and entertainment hub spanning 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, Round One and City Winery.

At One Westside, formerly known as Westside Pavilion, we, along with our partner, Hudson Pacific Properties, recently announced that we've 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 an 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 enter, with frontage along the heavily traveled I-405 Freeway in Los Angeles.

The project will open in 2 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're broken into different ownership groups.

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

6 of those 9 are now closed and the 3 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 9 stores are some of our best malls with average sales of 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 6 of these are closed, none of these leases have been rejected.

So as of today, we do not control these locations yet.

Moving on to the second group, 7 of the Sears locations are owned by Macerich and are leased to Sears for a very nominal rent.

Of those 7 stores, 4 are closed and 3 remain open and appear to be part of the Sears going concern portfolio, including Green Acres, Stonewood and Victor Valley.

Group 3 includes 5 Sears stores, 4 of which are owned by Seritage, 1 of which is owned by Sears.

Of those 5, 3 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 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've 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're 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 2 weeks.

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

(Operator Instructions) We'll take our first question from Jim Sullivan of 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're 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?

Well, part of it, Jim, is the comp period, and as you mentioned, we had softer same-center in the first 2 quarters of '18, stronger in second half.

So that would mean the second half of '19 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 3 tenants that filed bankruptcy within the last 2 weeks, Gymboree, Charlotte Russe and Things Remembered, collectively have 90 stores with us.

And we're 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 impact.

So Scott, unless you have a different opinion, I'd say that we would probably be fairly consistent through the year in terms of the same center numbers.

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 latter 3 quarters, given the fact we're in February today, Jim.

Okay.

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?

Yes, Jim.

It's, Doug.

That's exactly right.

(Operator Instructions) And we'll take our next question from Samir Khanal of Evercore.

Scott or Tom, I guess, could you just maybe help us a bit understand the range of sort of $3.50 to $3.58 on FFO?

What are some of the biggest swing factors that gets 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?

Yes.

Sure, Samir.

I think, we mentioned a couple things in the prepared remarks that it could swing either way.

The timeliness of when Sears rejects leases,is certainly a dictating factor.

We have assumed that the lion's share of our Sears portfolio stops paying rent as of February 1. So that could prove to be conservative.

Obviously, there's proceedings going on right now, and we'll see how that shakes out.

We mentioned the tenant bankruptcies and dependent upon the volume of closures and the timeliness of those proceedings, that can certainly influence the range like termination income is always one of those.

That's hard to peg.

We provided guidance that it's estimated at $12 million, which is down from the last few years.

So that's certainly a factor.

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

No, I'm just trying to understand maybe where you guys were -- I'm just trying to help -- get help in trying to figure out where you were -- why your guidance was off so much from consensus and why consensus is sort of wrong coming into the quarter.

I know you guys had sort of looked at all the models of the analysts.

I'm just trying to see what was it that we may not have picked up in the guidance?

Yes.

Sure.

Yes, let me touch on a few things.

Obviously, we've 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 model, so that should be factored in.

The anchor closures, that we provided our year-over-year impact at $0.08 of dilution in 2019, that's going to be a factor.

We've -- we obviously sold a few centers in 2018, there's going to be a carryforward dilutive impact.

We've commented on that.

That could be an area.

And then, I'd say, lastly, 2019 is a relatively light year in terms of contributions from our redevelopment pipeline.

We've got some accretion from projects like in Philly and Kings.

But bear in mind that Philadelphia is a late in the year opening, and there's going to be some ramp to the openings there through the midpart 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 Nordstrom lease at Country Club Plaza.

We -- 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 off-line and do a reconciliation with you, Samir.

Yes.

And just as a follow-up, I mean, we've seen strong increase in sales, but it didn't look like it's translated into percentage rents here.

How should we think about that line item for '19?

Well, there's a very small percentage of tenants pay percentage rents.

You're not going to be able to make a direct correlation for it.

I think we're going to continue to see a trend down somewhat in 2019.

Our preference is always to get base rent and in 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, you end up getting less percentage rent from any given tenant, and I would expect that to continue.

And we'll take our next question from Craig Schmidt of 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?

Craig, this is Scott.

We mentioned a few factors.

There was a significant retailer that we did -- upon lease expiration, had probably upwards of 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 downsizing to enable us to reposition that real estate retailers that we think will perform significantly better.

So there's that factor.

And then, in terms of our estimates for potential fallout from bankruptcies, for instance, there are some closures that we're 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's just the general estimate for what is likely to be a rent restructuring.

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.

Okay.

That's helpful.

And then, just the cadence of store closings in the malls, specialty space have been pretty active in the first part of -- the first 6 weeks of '19.

Are you expecting to maintain that or would this start to trail off just given the overall strength of the consumer?

Craig, typically, the first quarter is bankruptcy season.

They defied that a little bit in 2017 where it seemed to go throughout the entire year.

That being said, in terms of specialty tenants, 2018 was a relatively light year in terms of bankruptcies and closures.

But we typically see most of it in the first quarter.

These 3 tenants that I mentioned that have filed in the last 2 weeks, not really a surprise.

It's a surprise when they actually do it, but they both -- all 3 of them have been on our watch list for a number of years.

So the timing and the coincidence that all 3 filed within 2 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.

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

Just first question, I guess, Scott, a little clarification.

So you mentioned the 3 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 losses above and beyond what's known today and what that represents in terms of the same-center NOI growth forecast?

Yes, sure.

Todd, obviously, we don't have succinct visibility into the exact impact for any of these 3. But suffice it to say that we're carrying about 100 basis points of dilution in our same center guidance as a result of all this.

Because even though we know who has filed on those 3 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.

And at this point, we don't have the visibility into any of those 3 as to what the ultimate outcome is going to be.

Okay.

But that 100 basis point speculative cushion, I guess, that includes additional activity in addition to the change that you've discussed.

Is that correct?

That's correct, Todd.

Okay.

And then, just back to Sears.

So on the anchor rent loss, if I'm not mistaken, it sounded like you assume the February 1 liquidation of Sears altogether, but there's -- you have 3 Macerich-owned stores still open, 3 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?

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's probably about $0.015 of remaining exposure from Sears.

Most of the stores that are close today are the higher rent-paying stores, and with relatively rare exception, what remains pays very low rent.

We'll now take our next question from Jeremy Metz of 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're factoring in into the outlook here for 2019?

Yes, Jeremy, 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 the $5 million.

But hopefully, it can outperform, and we get closer to $5 mil rather than the $3 million or so that we projected.

All right.

And on the G&A front, any comments on how you feel about overhead cost today, you had a fair amount of savings in 2018.

So is there room for further savings there?

Is that something that's in the model?

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 early in the year, but we also had an offsetting, fairly generous severance payment to those individuals.

So real benefit will come through in 2019, and that's roughly $12 million of savings.

But does that assume any additional incremental savings?

Or is it all just a carryover?

That's primarily -- there's been additional cuts, but not as significant as that and we'll continue to work on that as well.

And we'll take our next question from Alexander Goldfarb of Sandler O'Neill.

Tom, just 2 questions.

So on the first question, if I hear you guys correctly, because you guys had previously disclosed the overall estimate revisions, about $0.04 negative impact from Sears, so it sounds like there's now an additional $0.04 to make it total $0.08.

The bankruptcies, if you said it's 100 basis points, that sounds like another $0.06.

The shrinking anchor, I'm guessing that's 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 on previous -- previously that make up sort of that $0.20 delta from where The Street is to where the midpoint of your guidance is?

Well, Alex, one aspect of that was the occupancy reduction we expect to see.

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've seen already in the first 6 weeks of the year.

So that's certainly an aspect of it.

And I'll also just add -- I was just going to say, I'd 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 modeled, Alexander.

Okay.

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?

Yes, sure.

The footnote is a confusing accounting pronouncement that came 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're modeling those 2 assets, which are consolidated assets at 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, half share of those 2 assets.

Okay.

So it's not that FFO guidance is actually $0.05 lower.

That's just purely accounting?

That's correct.

Purely accounting and it's really meant to be a modeling footnote for you.

Okay.

And then, if I can, on the Sears, Tom, how much capital have you -- do you expect that Sears will take?

And sort of what's your split up between backfilling as is versus ripping down and redeveloping?

Right now, we've got a $250 million to $300 million kind of placeholder, Alex, in the development pipeline.

Again, right now, we're not entirely sure which ones we're going to get back.

Seritage, as we said, 6 of the 9 are closed.

Those would be likely candidates.

We've 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 redemising 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 office as well, hotel.

But we think, right now, as we look at it, guess which ones were going to get back, it's going to be about 50-50.

We'll now take the next question from Christine McElroy of Citi.

Just following up on the $0.08 of impact from anchor terminations.

Is all of that assumed to be driven by Sears or are there any other anchor closures in there?

And how much of that $0.08 is impacting same-store NOI in terms of lost rent or co-tenancy impact?

I think you exclude redevelopment from same-center NOI.

So presumably, the Sears boxes, once they're rejected, they go into the redevelopment pipeline.

Hi, Christy, this is Scott.

Yes, you're 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 had very little exposure, for instance, to Bon-Ton and their bankruptcy, which occurred in roughly late summer of 2018.

But there's a little bit of carryforward impact from that.

But again, the majority relates to Sears.

Lastly, as it relates to co-tenancy, as we've mentioned to you in the past, co-tenancy was relatively minor.

To the extent there's any impacts, those have been reflected in our numbers.

Of course, those are -- there's a time delay to those, so it's relatively minimal to 2019, but that would be embedded within our same center numbers and it's already been factored in.

Okay.

Got you.

So the $0.08 is largely outside of the same-store?

Correct.

Okay.

And then, just following up on Alex's question, just with the assumed $30 million of capitalized interest.

With the Seritage JV, Sears boxes 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 with the JV?

Because I think that cost basis, you immediately would start capitalizing the $150 million as soon as those go into the pipeline.

Yes.

Sure, Christy.

So just in terms of rough numbers, so there's $150 million in terms of our basis.

2/3 of those stores have closed, so roughly 2/3 of that basis, we start capitalizing interest effective February 1. So when we assume the loss of rent, we'll assume the capitalization of interest.

Okay.

So it's based on the closure, not on the lease rejection?

No, it would be based on lease rejection.

But in the guidance, we'd assume that everything was going to be rejected as of February 1. So it's somewhat conservative in that regard.

And we'll now take our next question from Brian Hawthorne of RBC Capital Markets.

I just want to talk about some of the leasing conversations you're having.

How are -- are you guys still able to get about 2-ish percent contractual rent increases?

It's Doug.

Yes, it's 2% -- between 2% and 3%.

Do you get that pretty consistently?

Or is it kind of tough to get?

No, it's pretty consistent.

Okay.

And then, my other one is just on tenant retention, how does that look at lease expiration?

Has that changed at all?

It's 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're proactively going out and trying to replace those nonperformers.

So I would say that retention is in our hands and we're doing it depending on how we want to merchandise the center and with whom we want to merchandiser the center with.

Okay.

I mean, I guess, so when you kind of talk about that, is that kind of retention kind of being stable, I guess?

Is that saying that on a square foot basis, it's stable?

Or is it on a number of stores basis?

I guess what I'm getting at is, are your current tenants taking like downsizing?

Depending.

Some of the -- I mean, some of the tenants that are -- 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 of blowing it out in 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.

We'll now take our next question from Linda Tsai of 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 rent?

Yes, Linda.

This is Scott.

So we're 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 a broad brush, but there were wins as well as concessions.

And just to be clear, this was for 1 retailer or different retailers?

One retailer.

One retailer.

And then, I think, earlier, H&M said they were going to close 160 stores this year.

Do you know if any of these will be in your portfolio?

None that we're aware of.

Correct.

We'll now take our next question from Jeff Donnelly of Wells Fargo.

Just the first question around the new guidance.

I think it implies extremely tight FAD coverage of the current dividend with little incremental capacity undertaken, increased load of, I think, the redevelopment that you're 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?

Jeff, I think Scott went through a lot of liquidity plans we have as a result of the refinancing as a result of SanTan 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 the last quarter and we increased it very modestly, $0.01.

So we've just recently addressed that.

And I think our liquidity is more than enough to get us through the redevelopment pipeline.

And also, we should look at this year, that same center 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've averaged same-center 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've had on our watch list for 3 or 4 years.

So in some respects, the fact that they're going through their respective bankruptcies is it's painful short term, but long term, is healthy for the industry and for our portfolio.

Understood.

And maybe just one last question is I'm just curious how your own vision for Macerich has evolved as you move forward towards taking over leadership there.

Has that maybe changed at all over the last 6 months?

And maybe a sort of a second part to it, your predecessor retired after a 25-year stint at Macerich in his mid-60s, and you're 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?

Well, a couple of things on that, Jeff.

I've been here for a while.

So we've all been part of this Macerich team, Ed, myself, Scott and Doug for quite a while.

So there's not going to be dramatic changes, maybe a change in leadership style.

And I will admittedly say, I'm not quite as committed to some of the 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.

Okay.

I'll nominate someone to take you on.

Not me.

And we'll take our next question from Haendel St.

Juste of 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, 50 bps to 100 bps, what is the differential between the upper portion of your portfolio versus the lower portion?

Well, the lower assets really represent a pretty small percentage of our NOI, I'd say 5% or so.

So they're not real big influencers, and there's not a ready market to just go out into the market and sell those opportunistically at a strong cap rate.

From our view, they're 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've 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 into 2017.

We sold 25 of those centers.

So we reduced that number from about 15%, 20% of our portfolio to about 5%.

So we're content with those right now.

And they did not have a material adverse impact on that same center growth number.

Okay.

And then, I guess, a question on the rent reduction.

Do you think the majority of the rent reductions for your problem tenants occurred this year?

Or do you think we'll have a few more years of these reductions and to expect a similar impact next year?

Well, 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 6 weeks of the month.

That being said, our 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 3 that just recently filed, have been on our watch list for the past 3 or 4 years.

So I think the 2019 impact is not something I would necessarily project to see again in 2020 or 2021.

Okay.

That's helpful.

And I'm going to try to sneak in one last one.

Based on what you just mentioned in the prior response, I'm curious perhaps if you care to elaborate on a few of the items that you're thinking versus your predecessor is a bit different about?

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, I may spend more time working with our redevelopment folks on some of the Sears boxes and what we can do there, plus we're 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's not going to be any radical change in direction as a result of the change of CEO.

We'll now take our next question from DJ Busch of Green Street Advisors.

I just want to follow up on Christy's question.

Scott, I want to make sure I heard you correctly.

So when you think -- 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 be moved to the bottom, or moved into the redevelopment bucket?

No, DJ.

It's just the store itself.

Think of Seritage as kind of a siloed collection of stores, granted they're attached to Macerich malls.

But we're just pulling out the store volume in terms of the rent contribution, not the entire mall.

And is it just for the Seritage stores?

Or is that kind of a practice for other anchor vacancy as well?

It's -- look, what we're dealing with right now is a very nominal dilution from a set of approximately 4 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're pulling it out of same center.

Okay.

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 3. That sounds like they're kind of in process.

So from a liquidity standpoint, I understand where you guys are going, but just thinking about where leverage is today, just under 9x, 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 2 years?

DJ, this is Tom.

I'll have Scott check with you.

I think you may be missing a couple pieces in terms of net debt to EBITDA because we're closer to 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, and it'll 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're pretty comfortable with the rest of our balance sheet metrics, both maturity schedule, interest coverage ratio, which is north of 3x, which is pretty healthy.

We reduced the amount of floating rate debt we've got.

So there's a variety of things.

If we do nothing, it will stay between 8% and 9%, but it's also possible we could generate some liquidity through doing joint ventures and use that to pay down debt as well.

We'll take our final question from Tayo Okusanya of Jefferies.

Just going back to the question of your watch list.

Could you guys talk to us a little bit about what else is still kind of on the list?

The reason I asked is that in the context of your guidance, the additional reserves or additional conservatism you have in your numbers around additional store closures or rent loss apart from the retailers that already kind of announced bankruptcy?

Tayo, we always maintain a watch list depending on a variety of things, tenant sales, occupancy cost as a percent of sales, the financial health of the tenant, things like that.

And if you look at our watch list, excluding the tenants that just filed, and I don't want -- I'm not going to give specific names of tenants, but if we look at all these collectively, I'd say there's probably 300 stores in total that are on that watch list, and that's not an unusual number.

I think, over the past few years, we've had anywhere from 400 to 600 stores on the watch list.

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 3 tenants that just filed bankruptcy, so that's recently been reduced from about 400 to 300.

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

It's pretty much across the board.

I mean, you've got apparel in there, you've got jewelry in there, you get some that fall in the general category, but I think the bigger categories would be apparel and jewelry.

Okay.

And then, just one more from 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?

Or what's exactly -- is there any kind of financial interest in that project?

Yes.

We're ground leasing the land to Caesar's for that hotel.

So we'll...

And how long, is that going to be?

It's long term.

I can't remember off the top of my head, but it's 20 years or more.

So thank you for joining us today.

We're excited about the opportunities in front of us, and we look forward to working with you throughout the year.

This concludes today's call.

Thank you for your participation.

You may now disconnect.