Macerich Co (MAC) Q4 2018 Conference Call for earnings transcripts - The Motley Fool

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Macerich Co (NYSE: MAC)
Conference call on earnings for the fourth quarter of 2018
7 February 2019, 1:00 pm. ET

Content:

  • Observations prepared
  • Questions and answers
  • Call the participants

Prepared observations:

Operator

Good morning, and welcome to the conference call on the fourth quarter 2018 earnings of the Macerich Company. Today's conference is being recorded. At this moment, I would like to transform the conference into Jean Wood, Vice President of Investor Relations. Please continue.

Jean WoodVice President of Investor Relations

Thank you for joining us today in the call for the fourth quarter of 2018. During this call, we will make some statements that can be considered forecasts under the safe harbor of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from due to a variety of risks, uncertainties and other factors. Please refer to today's press release and SEC documents for a detailed discussion of forward-looking statements. Reconciliations of non-GAAP financial measures with the most directly comparable GAAP measures are included in the release of earnings and are further archived on Form 8-K with the SEC, which are published in the Investors section of the Company's website at the macerich address .com.

Joining us today are Tom O & # 39; Hern; CEO; Scott Kingsmore; Executive Vice President and Chief Financial Officer; and Doug Healey, Executive Vice President, Leasing.

With that, I would like to pass the call to Scott.

Scott KingsmoreExecutive Vice President, Chief Financial Officer and Treasurer

Thanks, Jean. Excuse me, the fourth quarter generally reflects good operating results, as evidenced by the strength of most of our key portfolio management parameters and an improvement in the growth of net operating income at the same center. As we have mentioned numerous times in the latest earnings calls, the failures and early interruptions of 2017 moderated growth in the first half of the 18th, as we work through the release of that space. As expected, we achieved greater operating growth in the second half of 2018.

Here are some highlights of the quarter. FFO per share was $ 1.90 per share, which beat our guide and reached consensus estimates. Annual FFO per share was $ 3.85, excluding $ 0.13 for activism costs previously incurred during 2018. This was in line with our $ 3.82 guide to $ 3.87. for action.

Year-end employment was 95.4%, up 40 basis points from year end & 17 and over 30 basis points from September 30, 2018. Half of this gain of 40 basis points it was temporary employment. Net operating income from the same center, excluding income from the termination of the lease, increased by 4.2% for the quarter, with an increase of 2.4% including rental income. During the quarter, we achieved a favorable multi-year tax appeal in one of our wholly owned assets, which is approximately 150 basis points of improvement on quarterly growth.

For the second half of 2018, we recorded a 4% growth compared to the second half of 2017, excluding revenues for the termination of the lease and a growth of 3.4%, including income for the termination of the lease. Real estate operating margins for 2018 improved by 60 basis points, up to 70% higher compared to 69.4% in 2017. And the expenses of REIT G & A and the Management Company showed an overall improvement or reduction of $ 2.3 million during the quarter.

Now on the 2019 guide. While this morning we provided a detailed operational guide, we thought it would be helpful to share a reconciliation of the main components of the actual FFO 2018 of $ 3.85 per share excluding activism with respect to the 2019 guidance. of $ 3.69 per share at the mid-point, which excludes a $ 0.15 year reduction from year to year we expect from the new leasing accounting standard. Most of these assumptions are listed in the guidance table contained in our supplemental documentation this morning, but this should help you get from 2018 to 2019.

One, we predict around $ 0.10 of growth over annual savings in terms of corporate overheads resulting from the reduction in the 2018 stance and other G & A reductions, all after tax.

Two, we expect about $ 0.12 of dilution due to the increase in interest expense in 2019, driven primarily by the increase in LIBOR and the impact of refinancing and higher rates.

Three, we expect about $ 0.08 of dilution from rents lost by lease terminations, mainly by Sears. This is obviously the dilution of short-term cash flow, while we execute long-term value creation opportunities within what is generally a well-positioned real estate asset. As of the end of 2018, several Sears stores had been closed, but none of the Sears leases were rejected until today and we hired rents only for the month of January for those nearby locations. Depending on the actions taken by Sears and the bankruptcy judge, this hypothesis could prove to be prudent.

Four, we expect about $ 0.04 of dilution from the combination of revenue reduction for the termination of the leasing ratio, the linear lining of rents and the income of SFAS 141.

And finally, on the front of the provisions, a couple of factors: one, we expect about $ 0.03 of dilution from the carry-forward impact of the 2018 provisions in 2019. And secondly, we generated about $ 0.03 of earnings for the sale of land in 2018 and we are not expected to gain any land sales in 2019.

Finally, some other notes concerning the orientation. Besides Sears, there have been three major cases of bankruptcy so far this year and we are cautiously bringing reserves in anticipation of this and further retailer failures. This is weighing down our anticipated operating growth in 2019. We have also entered into numerous new lease and store renewal contracts when the lease expires with a major retailer at reduced prices. This will also weigh on the operating growth of 2019. This retailer generally occupies large box positions and the online space is larger than 10,000 square feet. We have not planned new acquisitions or divestments within our 2019 guide. In terms of FFOs per quarter, we estimate 22% in the first quarter, 24% in the second quarter, 25% in the third quarter and the balance in the fourth quarter.

And finally, more details about driving are of course included in our additional 8-K financial information that has been reported this morning.

On the budget. As we have highlighted for you, in the last quarter, we expect to increase between $ 425 million and $ 450 million in liquidity from the Company's mortgage refinancing business in 2019. In early January, we closed a 12-year $ 300 million fixed rate loan on Fashion Outlet or Chicago at a fixed rate of 4.58%. This transaction yielded $ 100 million of incremental proceeds that were used to repay part of the Company's credit line.

We are now close to a $ 220 million commitment, a 10-year fixed rate loan for SanTan Village in Gilbert, Arizona, which we expect to close in the second quarter. This transaction would produce approximately $ 85 million of incremental liquidity. We are currently marketing the Chandler Fashion Center in Chandler, Arizona for a long-term fixed-rate loan from that class 8 regional mall. And then later this year, we plan to refinance Kings Plaza. Our product continues to be very favorable in the debt capital markets.

With this, I will hand it over to Doug to discuss the leasing and operating environment.

Doug HealeyExecutive Vice President, Leasing

Thanks, Scott. In the fourth quarter sales and employment remained buoyant and leasing rates continued. Portfolio sales ended the fourth quarter at $ 726 per square foot, representing an increase of 10% year-on-year. The economic sales per square foot, weighted according to US, amounted to $ 849 per square foot and rose from $ 770 per square foot a year ago.

Employment was 95.4% and this represented an increase of 40 basis points year on year. The spreads of the 12-month leases were 11.1% compared to 10.8% at 30 September 2018 and 15.2% for the 2017 year. These lease spreads comprised 32 contracts leases with rental reductions at the end of the lease. Excluding these 32 reductions in rented leases, spreads would have been closer to 13%. The average rent for the portfolio was $ 59.9 per square foot, an increase of 3.7% compared to $ 56.97 per square foot a year ago.

Leasing, volumes were strong during the fourth quarter and 279 leases were executed for a total of 984,000 square meters, bringing the total assets for 2018 to 825 leasing contracts executed for a total of just over 3 million square feet. Signed major rental contracts 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 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 of Scottsdale Fashion Square. And we have also opened a concept called brand box at Tysons Corner. Brand box is a first technologically induced site that offers flexible space to emerging brands to test bricks and mortar.

At 10,000 square feet the brand box has opened 100% occupied with five emerging brands and a previous brand, which is trying to reinvent itself. We are already talking with three brands to make a permanent long-term agreement, elsewhere in the center, which of course is our final goal. Furthermore, we opened 13 emerging brands in the fourth quarter. Among the notables, Bonobos at The Village at Corte Madera is located in Washington Square and Madison Reed and Invisalign on Broadway Plaza.

We remain active in the restaurant box categories with significant openings in the fourth quarter, including Din Tai Fung in Washington Square, Cheesecake Factory in South Plains and Tocaya Organica in Kierland; Burlington at Lakewood; 24-hour fitness at Pacific View; and Ross to Southridge. Other key openings across the portfolio include Anthropologie at Chandler, Polo Outlet and Fashion Outlets in Chicago, and two Hollister stores in 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, purchases are more prevalent and brand extensions are again discussed. The labor market is good, gas prices are low, the holiday of 2018 has been strong and consumers are in a state of mind. However, this must be somewhat mitigated due to the perceived economic slowdown in 2019, as well as the closure of the stores.

Traditional retailers who continue to reinvent themselves and focus on their products, their service, their experience are flourishing. Great examples are Apple, American Eagle, Hollister, Vans and Sephora. All the restaurants of fitness, theater, entertainment, experience and international brands are all active. Our buyers, especially millennials and gypsies, want everything, they want the right shops, they want food and drink, they want aesthetics, they want to be served and want to be entertained. And that's exactly what we focus on at the property level.

From our selection of stores to the service we provide to the experiences we create, Macerich continues to be an industry leader. And finally, I recently found what I thought was a very interesting article written by the ICSC. In 2018, ICSC mandated an external strategy and a research firm to conduct a study to monitor retail web traffic and consumer brand awareness among emerging and established brands. The study is titled Halo Effect, How Bricks Impact Clicks.

I am sure that many of you have read the study, but for those who have not done so, I strongly encourage you to do so. In the meantime, I would like to report four large take-aways. Number one, for existing dealers who open a new physical store in a market results in an average 37% increase in overall traffic to that retailer's website. The number two, increasing the number of physical stores by just 5% in a single market, has a significant advantage, digital engagement and web traffic. Number three, for emerging brands, the new store openings determine an average increase of 45% of web traffic after the opening of the store.

But the opposite is also true. Web traffic decreases when retailers close stores. And a case of retailers the share of web traffic between the markets in which they closed decreased up to 77%.

Thus, in conclusion, existing dealers are incentivized to expand into new markets or to expand into existing markets. Existing retailers have different reasons than the cost of employment to keep stores open in key markets and major shopping centers. Finally, and above all, it is now clear that emerging brands have all the incentives to open physical stores.

And with that, I'll deliver it to Tom.

Thomas E. O & HernChief Executive Officer and Director

Thanks, Doug. We had a good fourth quarter. If you look at the diluted FFO it grew by 6.5% to $ 166 million compared to the fourth quarter of last year. Employment increased by 40 basis points on an annual basis. We recorded good leasing volumes but we released the spreads, even if still in double figures they were moderate compared to the levels of 2017. Our shopping centers continue to generate healthy traffic and certainly continue to generate positive sales growth and to attract brands and relevant concepts.

As mentioned by Doug, we continue to see the leasing change mostly for the positive, the legacy brands are clearly differentiated between those who continue to invest in their brand and product, in their store experience and in their omni-channel strategies compared to those in difficulty, mainly due to the weight of historical leverage purchases and related budget problems.

As we continue to see an improved leasing environment with generally strong retail sales, we remain concerned about certain brands. Being able to recapture boxes of non-productive department stores in large shopping centers will continue to offer significant retraining opportunities for us. We have two interesting recent examples of this at Kings Plaza, where we took an inexpensive Sears store and replaced Zara, Burlington, Primark, JCPenney, which will collectively make 5 times the sales of the previous tenant.

At Scottsdale Fashion Square, where we replaced the Barneys department store with Apple and Industrious. We will see updates in other centers where we have the opportunity to regain department stores. There is also a request to add mixed use, including residential, hotel, entertainment, health and wellness and office components. These are attractive opportunities for us to diversify our cash flow sources over the next five years.

Looking at a prime example of this is Scottsdale Fashion Square, where development continues on our 80,000-square-foot outdoor expansion, which includes well-established restaurants and high-end fitness clubs. The expansion is 100% rented and includes an amazing collection of high-end restaurants, including Nobu, Ocean 44, Farmhouse and others. In the Barneys office, we opened a two-tiered Apple Point store, which features a number of experiential and educational elements.

In January, two weeks ago, the industrial and industrious cooperation operator opened a 33,000-square-foot co-working space. It was the best opening they've ever had and far exceeded their typical opening occupation.

It is expected that Apple and Industrious will generate substantially higher traffic and trade than those previously generated by the Barney department store box of 60,000 square feet. Also at Scottsdale Fashion Square, we debuted a newly renovated luxury wing and upgraded with an exciting range of new or newly refurbished dealers including Gucci, Prada, LOUIS VUITTON, Cartier, Breitling, Saint Laurent, Omega, St. John, Ferragamo and many others ..

Also, at Scottsdale Fashion Square, we are adding a hotel. Caesars Republic, a first of its kind, non-gaming room, Caesars brand will be built in the center. This four-star hotel will be developed by a third party in a land contract. The hotel will ideally be located adjacent to the 80,000-square-foot expansion.

Turning now to the Philadelphia Fashion District. The construction continues on a four-level shopping and entertainment center stretching over 800,000 square meters in the heart of downtown Philadelphia. We have signed lease agreements or commitments from 85% of the rentable area, the most important tenants include Century 21, Burlington, H & M, Nike, Forever 21, AMC, Round One and City Winery.

A One Westside, formerly known as Westside Pavilion, together with our partners Hudson Pacific Properties recently announced that we have signed Google as the sole occupant, the only tenant to occupy approximately 600,000 square feet of Class A creative office space. venture plans to invest about $ 500 million and $ 550 million and we expect to see a return of 8% on this project.

At the Los Angeles Premium Outlets, Carson's remediation authority began its work on the site to support the latest Los Angeles outlet project. This is a 50-50 joint venture with Simon Property Group to develop a 566,000-square-foot fashion outlet center, with (inaudible) along the busy 405 Freeway in Los Angeles. The project will open in two phases. The initial 400,000 square feet is currently scheduled to be delivered in the fall of 2021.

In the last quarter, I shared the details on our remaining Sears stores. I will briefly update you on the current status. We have 21 Sears stores and are divided into several property groups. The first group consists of nine Sears stores that belong to a 50-50 joint venture with Seritage, six of which nine are now closed and the remaining three open appear to be part of the Sears going concern portfolio, which includes Arrowhead, Denbury and Freehold. . Both Danbury and Freehold have already been converted to 50% in smaller Sears footprints by virtue of the Primark space lease.

These nine stores or some of our best shopping centers with average sales of $ 800 per foot. And we have plans for all these locations with a wide range of opportunities including the demolition of the box and the re-proportioning of the square footage with more productive uses. At this time, all six of these are closed, none of these leases has been rejected. So, until today, we do not check these locations yet.

Switch to the second group. Seven of the Sears locations are owned by Macerich and are rented in Sears for a very nominal rent. Of these seven stores, four are closed and three remain open to appear as part of the ongoing Sears news portfolio, including Green Acres, Stonewood and Victor Valley. Group three includes five Sears stores, four of which are owned by Seritage, one of which is owned by Sears. Of these five, three are closed and only the view of the hinterland and the Pacific remains open.

The date of refusal of the external lease is May, so it may continue for a few more months before the leases are rejected. And while it is uncertain when or if we will get control, our planning and leasing efforts will continue assuming that we will get control of these boxes.

As mentioned Scott, we assumed a significant loss of rent within our 2019 guide for anchored terminations, most of which concern Sears.

In closing, as we move towards 2019, we are not looking forward to progress on our retraining opportunities, we are encouraged by the improvement of the environment and the tone of leasing, but keep in mind that we also see dealers that they will not make it with the year

closures, including some big names that have filed bankruptcy in the last two weeks.

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

Questions and answers:

Operator

Thank you (Operator Instructions) We will take our first Jim Sullivan question from BTIG. Please continue.

Jim SullivanBTIG – Analyst

Sure. Thank you. Tom, just curious in the comments prepared, there was a breakout of FFO per quarter, which is useful, of course. But in terms of driving US of the same store for the whole year, which of course is somewhat disappointing, but we understand why you are providing it. Can you help us understand how it should change over the course of the year? In 2018, obviously, he was weaker in the first half, stronger in the second. Within the overall guide from 0.5% to 1%, are you assuming a trend similar to & # 39;

Thomas E. O & HernChief Executive Officer and Director

Well, part of it, Jim is the period of comp. And as you said, we had the same softest center in the first two quarters of the strongest and second half, so that would mean that the second half of the 19 would face more harsh extras. Also, it remains to be seen, not quickly, we will recover some of these stores. For example, the three tenants who have filed bankruptcy over the past two weeks, Gymboree, Charlotte Russe and Things Remembered, collectively have 90 stores with us.

And we're not sure how many of these stores will close or how much the renting will be required by those tenants and those could be the impact of the first half of the year. So, Scott, unless you have a different opinion, I would say that we will probably be fairly consistent during the year in terms of numbers from the same center.

Scott KingsmoreExecutive Vice President, Chief Financial Officer and Treasurer

Yes, I'd agree, Tom, since the biggest joker is the failures and they're in front of us, which will probably be weighted toward the last three quarters, given the fact that they were in that February of today, Jim.

Jim SullivanBTIG – Analyst

All right. And then a quick follow-up for me. On a sequential basis, sales per number of feet at Biltmore have declined significantly. Is it simply the result of the transfer of the Apple store to Fashion Square?

Doug HealeyExecutive Vice President, Leasing

Yes, Jim, it's Doug. This is exactly right.

Jim SullivanBTIG – Analyst

Ok, fantastic. Thank you.

Operator

(Instructions for the operator) So I'll take our next question from Samir Khanal of Evercore. Please continue.

Samir KhanalEvercore – Analyst

Hey, good afternoon, guys. Scott or Tom, I suppose, you could perhaps help us better understand the reach of $ 350 million to $ 358 million on FFO. What are some of the biggest swinging factors that take you out of the midpoint or low end or high end of that range? And maybe even to the extent that you could perhaps help us to think about where the consent was wrong, maybe to get into the driving version here?

Thomas E. O & HernChief Executive Officer and Director

Yes, of course, Samir. I think we mentioned a couple of things in the prepared observations that could oscillate either way. The timeliness of when Sears refuses the leases, certainly dictating factor. We hypothesized that the lion's share of our Sears portfolio ceases to pay rents from February 1, so it may prove prudent. Obviously, there are some acts going on right now and we'll see how it will break out.

We mentioned the failures of tenants and depending on the volume of closures and the timeliness of those proceedings that could certainly affect the range as termination income is always one of those, it is difficult to anchor we have provided indications that is estimated at $ 12 million, which is down from the last few years. So this is certainly a factor. And Samir, I apologize, what was the second part of your question?

Samir KhanalEvercore – Analyst

No, I'm just trying to figure out, maybe where you guys were, I'm just trying to get help transferring your whereabouts, because your guidance was so far from consent and consent was a bit wrong to come. I know you guys have somehow looked at all the models and analysts and trying to see what it was that maybe we did not gather in the guide.

Thomas E. O & HernChief Executive Officer and Director

Yes sure. Let me touch some things. Obviously, we were clear on our perspective that interest rates were an unfavorable factor. So we have provided a succinct disclosure in terms of what those figures are. But elsewhere, of course, the center itself is a surprise compared to where, I know you've modeled you guys. So, it should be taken into consideration. The anchor closures and we have provided our impact year on year at $ 0.08 of dilution in 2019, this will be a factor. Obviously we have sold some centers in 2018, there will be a dilutive impact of the carry-forward that we have commented, which could be an area.

And then I would say that, finally, 2019 is a relatively light year in terms of contributions from our redevelopment pipeline. And we have some growth from the Philly and Kings projects, but keep in mind that Philadelphia at the end of the year's opening and there will be some ramp to openings there in the middle of 2020, Kings Plaza arrived online during the half of & # 39; 18, so the part of the growth of that project was already perceived. And then by cutting from the other side, we have projects like Westside Pavilion, which of course is about to end. Paradise Valley that we continued to rent in the short term to give us the maximum control to redevelop that site. So some of these factors cut the other way.

Finally, please also note that we have announced our rental agreement with Nordstrom at Country Club Plaza, which comes with a repositioning of the real estate industry and that is probably something that you have not taken into consideration. So I think the total development contributions are probably in the $ 0.02 range, from $ 0.01 to $ 0.02 and we may have considered your model. So these are some highlights, but I'll be happy to take it offline and make a reconciliation with you, Samir.

Samir KhanalEvercore – Analyst

Yes, just as follow-up, I mean, we have seen a sharp increase in sales, but it does not seem to be translated into rental rates here, how should we think about that 19's advertising item?

Scott KingsmoreExecutive Vice President, Chief Financial Officer and Treasurer

Well, there's a very small percentage of paid tenants, percentages of rentals that you will not be able to make a direct correlation. I think we will continue to see a downward trend in 2019. Our preference is always to get the basic rent and fixed TAM charges rather than the percentage rent. Usually, when the leases expire and we renew, we try to increase the base rent and with this we end up obtaining a lower percentage rent from a given tenant. I would expect it to continue.

Samir KhanalEvercore – Analyst

Ok, thanks guys.

Scott KingsmoreExecutive Vice President, Chief Financial Officer and Treasurer

Thank you.

Operator

We will now take our next question from Craig Schmidt of Bank of America. Please continue.

Craig SchmidtBank of America – Analyst

Yes. Excellent thanks. I was wondering how much of a drag on the same center is related to the restructuring of leases with respect to free space?

Scott KingsmoreExecutive Vice President, Chief Financial Officer and Treasurer

Craig, this is Scott. We have mentioned some factors. We were an important reseller that we did when the contract expired, probably with over 20 agreements that we concluded with the restructuring. It is a retailer who usually occupies a larger footprint. And those were not generally closures. Sono state le riduzioni più significative delle istanze per permetterci di riposizionare quel settore immobiliare con i rivenditori che riteniamo si comportino in modo significativamente migliore. Quindi c'è quel fattore.

E poi, in termini di stime per potenziali ricadute da fallimenti, ad esempio, ci sono alcune chiusure di cui siamo a conoscenza in questo momento, come risultato dell'uscita dalle vendite commerciali da parte dei rivenditori che hanno già depositato. Ma poi, per di più, c'è solo una stima generale di quella che potrebbe essere una ristrutturazione dell'affitto.

Thomas E. O'HernAmministratore delegato e direttore

Quindi, nella nostra guida, Craig, abbiamo effettivamente ipotizzato una riduzione di occupazione nel corso del 2019 di qualsiasi tra 50 e 100 punti base.

Craig SchmidtBank of America – Analista

Ok, è utile. E poi la cadenza delle chiusure dei negozi nello spazio delle specialità del centro commerciale è stata piuttosto attiva nella prima parte di – le prime 6 settimane del 19. Ti aspetti che lo mantenga o comincerebbe a svanire solo in considerazione della forza complessiva del consumatore?

Thomas E. O'HernAmministratore delegato e direttore

Craig, in genere la stagione del fallimento del primo trimestre. Lo hanno sfidato un po 'nel 2017, dove sembra risalire per tutto l'anno. Detto questo, in termini di inquilini speciali il 2018 è stato un anno relativamente leggero in termini di fallimenti e chiusure. Ma di solito ne vediamo la maggior parte nel primo trimestre, questi tre inquilini che ho menzionato nelle ultime due settimane, non è una sorpresa, è una sorpresa quando lo fanno, ma entrambi – tutti e tre sono stati nella nostra lista di controllo per un certo numero di anni. Quindi i tempi nella coincidenza che tutti e tre sono stati archiviati entro due settimane, probabilmente hanno reso la nostra visione del 2019 un po 'più conservativa di quanto fosse un mese fa. Quindi direi che ci aspettiamo di vedere di più quest'anno. Mi aspetto che sia caricato front-end e, di nuovo, è abbastanza tipico.

Craig SchmidtBank of America – Analista

Grazie.

Operatore

Prenderemo ora la nostra prossima domanda da Todd Thomas di KeyBanc Capital Markets. Per favore prosegui.

Todd ThomasKeyBanc Capital Markets – Analista

Ciao grazie. Solo la prima domanda immagino Scott un piccolo chiarimento. Quindi, lei ha citato i tre principali cambiamenti di fallimento della schedatura stanno annunciando chiusure nel '19 di oggi che sono incorporate nella guida, più quell'ipotesi che è in cima a quella per qualche ulteriore caduta. Puoi appena scoprire quanta perdita di NOI è al di sopra e al di là di ciò che è noto oggi e cosa rappresenta in termini di previsioni di crescita NOI allo stesso centro?

Scott KingsmoreVicepresidente esecutivo, direttore finanziario e tesoriere

Si certo. Todd, ovviamente, non abbiamo una visibilità concisa sull'impatto esatto per nessuno di questi tre. Ma basti dire che stiamo portando circa 100 punti base di diluizione nella nostra stessa guida centrista come risultato di tutto questo.

Thomas E. O'HernAmministratore delegato e direttore

Bene, perché anche se sappiamo chi ha archiviato questi tre di cui abbiamo parlato e 90 negozi. Storicamente, vedremmo che il 50% di quei negozi chiude il 25% rinegoziando i termini di affitto e il 25% rimane invariato. E a questo punto, non abbiamo la visibilità in nessuno di questi tre su quale sarà il risultato finale.

Todd ThomasKeyBanc Capital Markets – Analista

All right. Ma quella domanda speculativa su 100 punti base, suppongo che includa attività aggiuntive oltre al cambiamento che sei – ne hai discusso. È corretto?

Scott KingsmoreVicepresidente esecutivo, direttore finanziario e tesoriere

È corretto, Todd.

Todd ThomasKeyBanc Capital Markets – Analista

All right. E poi appena tornato a 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 three Macerich-owned stores still open, three of the Seritage boxes are still open, so how much of the $0.08 per share dilution that's in guidance is related to anchor rents that's already accounted for with stores that are closing, and how much of that is also sort of I guess speculative in nature?

Scott KingsmoreExecutive Vice President, Chief Financial Officer and Treasurer

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 closed today are the higher rent paying stores, and with relatively rare exception what remains pays very low rent.

Todd ThomasKeyBanc Capital Markets — Analyst

Okay, that's helpful. All right. Grazie.

Operator

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

Jeremy MetzBMO Capital Markets — Analyst

Hey, guys. Hey, 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 into the outlook here for 2019?

Thomas E. O'HernChief Executive Officer and Director

Sì. Jeremy, that continues to be a big focus and push for us to continue to take advantage of the common area and populated 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 million, rather than the $3 million or so that we projected.

Jeremy MetzBMO Capital Markets — Analyst

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?

Thomas E. O'HernChief Executive Officer and Director

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

Jeremy MetzBMO Capital Markets — Analyst

But does that assume any additional incremental savings? Or is it all just a carryover?

Thomas E. O'HernChief Executive Officer and Director

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

Operator

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

Alexander GoldfarbSandler O'Neill — Analyst

Hey, good morning out there. Tom, just two questions. So on the first question, if I hear you guys correctly, could you guys had previously disclosed, when they're all the 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 a 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 previously that make up sort of that $0.20 delta from where the street is to where the midpoint of your guidance is?

Thomas E. O'HernChief Executive Officer and Director

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 six weeks of the year. So that's certainly an aspect of it.

Scott KingsmoreExecutive Vice President, Chief Financial Officer and Treasurer

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've modeled Alexander.

Alexander GoldfarbSandler O'Neill — Analyst

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?

Scott KingsmoreExecutive Vice President, Chief Financial Officer and Treasurer

Yeah, sure. The footnote is a confusing accounting pronouncement that came in into effect January 1, '18. Our interest expense Alexander is really just interest from debt. But I'd just point out in the footnote that if you're modeling those two 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 have share of those two assets.

Alexander GoldfarbSandler O'Neill — Analyst

Okay. So it's not that FFO guidance is actually $0.05 lower. That's just purely accounting?

Scott KingsmoreExecutive Vice President, Chief Financial Officer and Treasurer

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

Alexander GoldfarbSandler O'Neill — Analyst

Okay. And then if I can on the Sears, Tom, how much capital have you — do you expect that these Sears will take and sort of what's your split out between backfilling as is versus ripping down redevelopment?

Thomas E. O'HernChief Executive Officer and Director

Right now, we've got $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 six of the nine 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 i, guess which ones were going to get back, it's going to be about 50-50.

Alexander GoldfarbSandler O'Neill — Analyst

Okay, thank you.

Thomas E. O'HernChief Executive Officer and Director

Grazie.

Operator

Now take the next question from Christy McElroy of Citi. Please go head.

Christy McElroyCiti — Analyst

Hi, good morning to you guys. Just following up on $0.08 of impact from anchor terminations, is all of that is seems to be driven by Sears, are there any other anchor closures in there? And how much of that $0.08 is impacting same-store NOI in terms of loss trend or cotenancy impact? I think you exclude redevelopment from same-store NOI. So I'm presumably the Sears Boxes once rejected they go into the redevelopment pipeline.

Scott KingsmoreExecutive Vice President, Chief Financial Officer and Treasurer

Yeah. Hi, Christy, this is Scott. Yeah, you're correct on the latter comments. The anticipated reduction of rents comes out of the same-center pool. The lion share of that $0.08 does relate to Sears. We had very little exposure for instance to Bon-Ton in their bankruptcy, which occurred in roughly late summer of 2018. But there's a little bit of carry forward impact from that, but again the majority relates to Sears.

Lastly, as it relates to cotenancy. As we've mentioned to you in the past, cotenancy was relatively minor to the extent there is any impacts, those have been reflected in our numbers. Of course, those are — there is a time delay today. So it's really relatively minimal to 2019, but that would be embedded within our same-center numbers and it's already been factored in.

Christy McElroyCiti — Analyst

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

Scott KingsmoreExecutive Vice President, Chief Financial Officer and Treasurer

Correct.

Christy McElroyCiti — Analyst

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 is your cap interest forecast assume just with regard to the Sears boxes in terms of the timing of rejection and when you start capitalizing the cost basis of the JV? I think the cost basis you immediately would start capitalizing the $150 million as soon as those go into the pipeline.

Scott KingsmoreExecutive Vice President, Chief Financial Officer and Treasurer

Yeah, sure, Christy. So just in terms of rough numbers, so there's $150 million in terms of our basis. Two-thirds of those stores have closed, so roughly two-thirds of that basis, we start capitalizing interest effective February 1. So when we assume the loss of rent, we will assume the capitalization of interest.

Christy McElroyCiti — Analyst

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

Thomas E. O'HernChief Executive Officer and Director

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.

Christy McElroyCiti — Analyst

Got it. Okay, thank you.

Operator

And we will take our next question from Brian Hawthorne of RBC Capital Markets.

Brian HawthorneRBC Capital Markets — Analyst

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 contractual rent increases.

Doug HealeyExecutive Vice President, Leasing

It's Doug. Yes, yes, it's 2% — between 2% and 3%.

Brian HawthorneRBC Capital Markets — Analyst

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

Doug HealeyExecutive Vice President, Leasing

No, it's pretty consistent.

Brian HawthorneRBC Capital Markets — Analyst

Okay. And then my other one is just on kind of retention, how does that look at lease expiration? Has that changed at all?

Doug HealeyExecutive Vice President, Leasing

It's Doug again. Not really, the tenants that are suffering the ones that are closing stores. Obviously, we're not trying to retain and given our portfolio, that's 95%, 96% leased. We are proactively going out and trying to replace those non-performers. 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 merchandise center with.

Brian HawthorneRBC Capital Markets — Analyst

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 quite downsizing, OK?

Doug HealeyExecutive Vice President, Leasing

Depending, some of — 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 just sort of blowing it out and sales realize that they need to be a little bit bigger, so it really does depend on the retailer. But I would say, right now it's more popular to be small than it is to be larger.

Brian HawthorneRBC Capital Markets — Analyst

Okay. Thanks for taking my questions.

Thomas E. O'HernChief Executive Officer and Director

Grazie.

Operator

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

Linda TsaiBarclays — Analyst

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?

Scott KingsmoreExecutive Vice President, Chief Financial Officer and Treasurer

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

Linda TsaiBarclays — Analyst

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

Scott KingsmoreExecutive Vice President, Chief Financial Officer and Treasurer

One retailer.

Linda TsaiBarclays — Analyst

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?

Scott KingsmoreExecutive Vice President, Chief Financial Officer and Treasurer

None, that we're aware of.

Doug HealeyExecutive Vice President, Leasing

Correct.

Linda TsaiBarclays — Analyst

Thanks.

Operator

We'll now take our next question Jeff Donnelly of Wells Fargo. Please go ahead.

Jeff DonnellyWells Fargo — Analyst

Good afternoon, guys. 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?

Thomas E. O'HernChief Executive Officer and Director

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 in Chicago and Kings Plaza. We should see $400 million of excess procedure, which will be temporarily used to pay down our line of credit and used for the redevelopments. The Board addressed a dividend in the last quarter and we increased it very modestly $0.1. So we've just recently address that. And I think our liquidity is more than enough to get us through the redevelopment pipeline. And also, as you look at this year, that same-center growth rate of 0.5 the 1 is not something we expect to be the new norm. If you look over the past 10 years, we've averaged same-store NOI growth of 3.2%.

So to me, this is a low point and we would expect same-center NOI and cash flow to grow at a much more robust rate as we move into 2020 and beyond. Again, some of these bankruptcies that are causing the tightness in the same-center, our tenants that we've had on our watch list for three or four 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.

Jeff DonnellyWells Fargo — Analyst

Understood. And maybe just one last question is, I'm just curious how you're — your own vision for Macerich has evolved as you move forward toward taking over leadership there. Has that may be changed at all over the last six 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 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?

Thomas E. O'HernChief Executive Officer and Director

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, add 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 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 to too worried about 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 question for them.

Jeff DonnellyWells Fargo — Analyst

Okay. I'll nominate some to take you on. Thanks guys

Thomas E. O'HernChief Executive Officer and Director

Not me.

Operator

And we'll take our next question from Haendel St. Juste of Mizuho. Please go ahead.

Haendel St. JusteMizuho — Analyst

Hey, there. 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, 200 bps, what is the upper portion of your portfolio versus the lower portion?

Scott KingsmoreExecutive Vice President, Chief Financial Officer and Treasurer

Well, that the lower assets really represent pretty small percentage of our NOI. And 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 cash 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.

Haendel St. JusteMizuho — Analyst

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?

Thomas E. O'HernChief Executive Officer and Director

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 six 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 three that just recently filed, have been on our watch list for the past three or four years. So I think the 2019 impact is not something I would necessarily projected to see again in 2020 or 2021.

Haendel St. JusteMizuho — Analyst

That's helpful. Thanks. 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 it?

Thomas E. O'HernChief Executive Officer and Director

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 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 with CEO.

Haendel St. JusteMizuho — Analyst

Thanks, Tom.

Operator

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

DJ BuschGreen Street Advisors — Analyst

Thanks. 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?

Scott KingsmoreExecutive Vice President, Chief Financial Officer and Treasurer

No, DJ. It's just the store itself. Think of Seritage as 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.

DJ BuschGreen Street Advisors — Analyst

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

Scott KingsmoreExecutive Vice President, Chief Financial Officer and Treasurer

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

DJ BuschGreen Street Advisors — Analyst

Okay. And then maybe a follow-up on Jeff's question. Just you guys address the liquidity. You have FOC behind you. You have the other three 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 9 times, probably moving higher over the next year. When do you see that inflection point Scott? When should we expect that levers to come back down probably the levels we saw just even going back maybe two years?

Thomas E. O'HernChief Executive Officer and Director

DJ, this is Tom. I have Scott check with you. I think you may be missing a couple of 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 will gradually start to come down. That being said, we could also at some point in the future do a joint venture and generate some equity and delever with that.

So other than that one metric, we're pretty comfortable with the rest of our balance sheet metrics both maturity schedule, interest coverage ratio, which is north of 3 times, which is pretty healthy. We've reduced the amount of floating rate debt we've got. So there is a variety of things. We do nothing it will stay between 8% and 9%, but it's also possible we could generate some liquidity through joint ventures and use that to pay down debt as well.

DJ BuschGreen Street Advisors — Analyst

Okay, very good. I'll follow up with Scott. Thanks, Tom.

Thomas E. O'HernChief Executive Officer and Director

Thanks. I think we got time for one more operator.

Operator

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

Tayo OkusanyaJefferies — Analyst

Just going back to the question of your watch list. Could you guys talk to us a little 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 bankruptcies?

Scott KingsmoreExecutive Vice President, Chief Financial Officer and Treasurer

Tayo, we always maintain a watch list depending on a variety of things, tenant sales, occupancy cost as a percentage 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 looked 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 three tenants that just filed bankruptcy, so that's recently been reduced from about 400 to 300.

Tayo OkusanyaJefferies — Analyst

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

Scott KingsmoreExecutive Vice President, Chief Financial Officer and Treasurer

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.

Tayo OkusanyaJefferies — Analyst

Okay. And then just one more from me if you don't mind. The wholesale development with Caesar, you guys don't have a stake in that, but I think ground leasing it from Macerich? Or what's exactly, is there any kind of financial interest in that project.

Scott KingsmoreExecutive Vice President, Chief Financial Officer and Treasurer

Yeah, we're ground leasing the land to Caesars for that hotel. So we'll…

Tayo OkusanyaJefferies — Analyst

(inaudible)

Thomas E. O'HernChief Executive Officer and Director

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

Tayo OkusanyaJefferies — Analyst

Got it. All right. Grazie.

Scott KingsmoreExecutive Vice President, Chief Financial Officer and Treasurer

Grazie.

Thomas E. O'HernChief Executive Officer and Director

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.

Operator

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

Duration: 61 minutes

Call participants:

Jean WoodVice President of Investor Relations

Scott KingsmoreExecutive Vice President, Chief Financial Officer and Treasurer

Doug HealeyExecutive Vice President, Leasing

Thomas E. O'HernChief Executive Officer and Director

Jim SullivanBTIG — Analyst

Samir KhanalEvercore — Analyst

Craig SchmidtBank of America — Analyst

Todd ThomasKeyBanc Capital Markets — Analyst

Jeremy MetzBMO Capital Markets — Analyst

Alexander GoldfarbSandler O'Neill — Analyst

Christy McElroyCiti — Analyst

Brian HawthorneRBC Capital Markets — Analyst

Linda TsaiBarclays — Analyst

Jeff DonnellyWells Fargo — Analyst

Haendel St. JusteMizuho — Analyst

DJ BuschGreen Street Advisors — Analyst

Tayo OkusanyaJefferies — Analyst

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