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Macerich Co  (NYSE:MAC)
Q3 2018 Earnings Conference Call
Nov. 01, 2018, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to The Macerich Company, Third Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jean Wood, Vice President of Investor Relations. Please go ahead.

Jean Wood -- Vice President of Investor Relations

Thank you everyone for joining us today on our Third Quarter 2018 Earnings Call. During the course of this call, management may make certain statements that may be deemed forward-looking 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 website at macerich.com.

Joining us today are Tom O'Hern, Senior Executive Vice President and Chief Financial Officer; Doug Healey, our Executive Vice President, Leasing; and Scott Kingsmore, Senior Vice President, Finance. With that, I would like to turn the call over to Tom.

Tom O'Hern -- Senior Executive Vice President and CFO

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

As we mentioned several times on our last calls that bankruptcies and early terminations in 2017 tempered our growth in the first half of 2018, as we work through leasing out that space. Most of that space has been released by September 30th as is evidenced by our 95% occupancy rate.

We continue to see an improving leasing environment with a strong retailer sales, far fewer bankruptcies and a much more positive tone from the retail community. Looking at results of operations for the quarter, FFO was $0.99 per share which compared favorably to our guidance of $0.97 and exceeded the $0.96 reported in the third quarter of last year.

Quarter end occupancy was 95.1%, up 80 basis points from last quarter and up 80 basis points from September 30th, 2017. Same center net operating income including lease termination revenue was up 3.7% for the quarter, excluding lease termination revenue, same center was up 3.1%. As we indicated on the last earnings call, we expected to see this acceleration in same center in the second half of 2018. We also expect the fourth quarter to exceed 3%.

The property gross operating margin improved by 80 basis points to 69.4%, up from 68.6% last year at the third quarter. Now looking at the Sears bankruptcy and its impact on us, we have a total of 21 Sears stores. That is significantly less than the 40 Sears locations we had in 2012. As a result of our disposition program over the past six years, we have reduced our Sears exposure by nearly 50%.

The average building size is 150,000 square feet on a parcel size that ranges from 10 acres to 20 acres. The Sears bankruptcy was long expected and represents a great opportunity for us to improve our high-quality portfolio, both in terms of tenant quality, sales productivity, traffic and densification. The redevelopment we have recently completed at Kings Plaza is a great example of that.

The Sears boxes can be categorized into three different ownership groups. The first is nine of the Sears stores are owned 50-50 in a joint venture with Seritage; seven of those nine are on the closure list, the other 2 Danbury and Freehold have already been 50% converted by virtue of putting Primark in those locations.

These stores are at some of our best malls. That group has an average sales per foot of $780 per square foot. We have plans for all of these locations with a range of opportunities including demolishing the box and repurposing the square footage with more productive uses including mixed use and densification. In certain locations, we will be redemising the existing box and putting in more productive retail uses that will generate significantly more rent, sales and traffic than Sears provided.

The second group of stores we have seven locations that are owned by us and leased to Sears for a very nominal rent. One of those locations is already closed and the others are not on the closure list and it is not clear at this time what Sears' intentions are with those stores. These locations if closed, will allow us the opportunity to replace the non-productive department store box with a more productive traffic generating use.

The last group are the stores, the five stores that are not owned by us, four of which are owned by Seritage, one is owned by Sears. One of the locations is closed and two of the Seritage owned stores are on the closure list. A number of you have asked about co-tenancy issues if Sears closes all of their stores. At 11 of our centers, we have 0 co-occupancy exposure.

At the other 10, the amount is immaterial, in total about $0.01 a share if all those locations closed. Of the 16 locations that we have ownership positions in, we would estimate our pro-rata share of the capital requirements to redevelop those to be in the range of $250 million to $300 million spent over the course of the next three years to four years.

Shifting now to the redevelopment/development pipeline. At Kings Plaza in Brooklyn during the third quarter, we had the grand opening of the $100 million redevelopment. This was a case where we recaptured the Sears box that was doing under $30 million in sales, the project significantly improved the overall tenant mix of the center with the addition of Primark, JCPenney, Burlington and Zara, all of which opened in the third quarter.

Consumer traffic is up significantly, and the overall shopper experience has improved dramatically. These new retailers in total are expected to do over $100 million in annual sales. And it's also very significant physical transformation and you can see the before and after photos on the cover of our supplement.

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

We have signed leases or have commitments for tenants for over 87% of leasable area. Noteworthy commitments includes Century 21, Burlington, H&M, Forever 21, Columbia Sportswear, AMC Theaters, City Winery and Ulta. We have a number of other exciting tenants we will be announcing in the near-term, a grand opening is planned for September 2019.

At Scottsdale Fashion Square we're under construction of 180,000 square-foot exterior expansion including restaurants and high-end fitness club. The expansion is 100% leased and includes Nobu and Ocean 44 restaurants among others.

In addition, we have opened a new Apple store and are adding co-working space in what had been the Barneys Store. Apple held their grand opening on September 29th and the construction of the industrious co-working space for the balance of the former Barneys box is in process for an anticipated first quarter of '19 opening.

We expect sales productivity for this box to be significantly higher than what we're seeing from the Barney's location. This is another prime example of an adaptive reuse of an underperforming acre store with vastly better traffic generating uses.

In September, we were pleased to announce that we formed a 50-50 joint venture with the Simon Property Group to create Los Angeles Premium Outlets. This is a tremendous site located on heavily traveled 405 Freeway in Los Angeles. We will be co-developing and jointly leasing this project designed to open its first phase with 400,000 square feet followed by an additional 166,000 square feet.

The city currently is under way with their site work and we will commence our construction once they finish that. The planned opening is fall of 2021.

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

Scott Kingsmore -- Senior Vice President, Finance

Thank you, Tom. The balance sheet continues to be in good shape. At quarter end, the balance sheet metrics were as follows; debt-to-market cap was 48%, average debt maturity is 5.3 years and our maturities are very well laddered by year into the future.

Interest coverage is 3.2 times, net debt-to-EBITDA on a forward basis is 8.2 times, remaining 2018 maturities are only $9 million at the Company's share. At September 30, 2018, the weighted average interest rate was up 25 basis points to 3.89% as compared to September 30, 2017. This is a consistent trend that we expect to continue into 2019.

In terms of our near-term financing plans here are a few highlights. In Q3, we reduced our floating rate debt from 21% to 16% of our total debt by swapping $400 million of our floating rate exposure to fixed.

This 3-year swap at 2.85% effectively locked (ph) $400 million of our revolving line of credit at a fixed rate of 4.3% for three years through September 30, 2021. As well, to create additional liquidity and to further reduce our floating rate debt exposure, we have planned the financing of Fashion Outlets of Chicago which is currently encumbered by a $200 million floating rate loan.

We have arranged to refinance the property with a $300 million, 12-year fixed-rate loan with a major life insurance company. The refinance is expected to close in January 2019 and will further reduce our floating rate debt to approximately 12% of total debt.

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

We would expect to see about $350 million of excess proceeds upon the refinancing of these three assets in mid through late 2019. Collectively, with Fashion Outlets of Chicago, we expect to raise approximately $450 million of capital in 2019 with these four refinancing transactions.

Now on to 2018 guidance. As mentioned in our earnings release last night, we are narrowing the range of our previously issued earnings guidance to reflect our current expectation of results for the remainder of 2018. The narrowed range for FFO per share excluding costs related to shareholder activism that were recognized in the second quarter of this year is now $3.82 per share to $3.87 per share.

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

This assumes a fourth quarter range of 3% to 3. 5% of same center at operating income growth. This full year guidance also equates to a same center net operating income range of 2.2% to 2.7% excluding lease termination income.

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

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

Our assumption for bad debt expense also modestly increased by $1 million as well. Both assumptions are simply a function of having better visibility now to these forward-looking assumption than we had three months ago. In gross dollars though, $2.5 million is not a significant change to our company.

In addition, you will note that our -- we increased our interest expense guidance by approximately $1 million, primarily to account for the swap transaction that I mentioned a few minutes ago. More details of the guidance assumptions are included in the Company's Form 8-K supplemental financial information.

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

Doug Healey -- Executive Vice President, Leasing

Thanks Scott. In the third quarter sales remained strong and leasing velocity continued. Portfolio of sales ended the third quarter at $707 per square foot which represented a 7.3% increase on a year-over-year basis. Economic sales per square foot which are weighted based on NOI were $819 per square foot and that's up from $770 per square foot, a year ago.

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

Trailing 12-month leasing spreads were 10.8%, and as we mentioned on our last earnings call, in the second quarter, we had a package of 11 deals with one particular tenant averaging 4,300 square feet.

Excluding those leases, spreads would have been closer to 14%. Average rent for the portfolio was $59.09, that's up 4% from $56.88 as of September 30th, 2017. Leasing volumes were strong. During the third quarter, a total of 856,000 square feet of leases were signed, bringing the total activity during the first nine months to over 2 million square feet.

The average term for the leases signed in the third quarter was 5.4 years, that's similar to the second quarter. Three new flagship leases were executed this quarter. Lululemon at Scottsdale Fashion Square, Anthropologie at Chandler Fashion and H&M at Danbury Fair.

Tom mentioned the opening of the new Apple flagship at the Scottsdale Fashion Square which is nothing short of incredible. It's one of the nicest stores I've ever seen attached to a super regional shopping center with fabulous inside and outside exposure. It really is a must see. Understanding the need to differentiate, to stay cutting-edge and to accommodate the demand of our shoppers, we continue to elevate our food, entertainment and experiential offerings.

As Tom mentioned in the third quarter, we signed leases with City Winery at Fashion District, Philadelphia and Nobu at Scottsdale Fashion Square. Other recently signed leases in these categories include: The Void, Tysons Corner, Round 1 Bowling at Valley River, Crayola at Chandler Fashion Center and Cheesecake Factory at South Plains.

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

Other retailers in these categories include Two Bit Circus, Pinstripes, Dave & Buster's, Puttshack (ph) out of London and rec room out of Canada all of whom we are actively working with. Theaters are also expanding and we look forward to furthering our business with some of the industry leaders such as Cinemark, CineBistro, Bow Tie and others.

Lastly, in the experiential category, the Cayton Children's Museum is well under construction in the third level of Santa Monica Place and will open in the first quarter of 2019. This is one of the most exciting deals we've completed in this category this year. The museum will be the only one of its kind in all of Los Angeles and it's expected to attract over 400,000 visitors per year.

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

We remain active with the digitally native brands executing multiple leases, including the first ever bricks-and-mortar store with (inaudible) at Tysons Corner. We also signed Alex & Ani at (inaudible) B8TA at Scottsdale Fashion Square, (inaudible) at Twenty Ninth Street and The Village at Corte Madera, Rudi at Twenty Ninth Street, Stance at Washington Square and Madison Reed's Broadway Plaza.

Additionally we will be opening up four UNTUCKit micro stores in the common areas at Vintage, Fresno, Freehold and Los Cerritos for holiday this year. Excluding Sears, there are five bankruptcies totaling 16 stores in the third quarter. Of the five bankruptcies, only four stores closed.

The bankruptcies were comprised of smaller brands with only Brookstone actually liquidating. Year-to-date non-anchor closures totaled only 16 stores and that compares to 92 closures in 2017. This is the slowest closure pace we've seen since 2012.

Sears filed for bankruptcy as Tom mentioned on October 15th, 2018 and this bankruptcy has long been anticipated and we've been actively working on redevelopment plans for all of our Sears locations. So in conclusion, our leasing metrics remain solid and the level of bankruptcy is significantly lower. We continue to focus not only on our traditional retailers, but also those in the entertainment, experiential and digital sectors.

And most importantly in terms of the leasing environment, we believe the tone and the sentiment are definitely showing signs of improvement. And with that, we'll open it up to Q&A.

Questions and Answers:

Operator

Thank you. (Operator Instructions). We will take our next question from Jim Sullivan of BTIG. Please go ahead, your line is open.

James Sullivan -- BTIG -- Analyst

Okay, thank you. Tom, I think when you were in your prepared comments you talked about the capital requirements of retenanting vacated anchors and you gave a number of $250 million to $300 million. And I wasn't clear exactly how many boxes that related to, number one. And kind of a second part of that question, can you tell us, of those boxes how many are simply going to be a straightforward replacement of one anchor with another anchor as opposed to a kind of a reconcepting of the space into smaller stores that might generate perhaps significantly higher income?

Tom O'Hern -- Senior Executive Vice President and CFO

Well, Jim it's going to be a combination of things. That number really relates to the top two categories that I mention first, the nine locations we have with Seritage, and that also including the several locations that we own. The exact details to be determined, that's just an estimate, some will merely be a redemising of the existing box, but some of our best opportunities will be in those some of those Seritage properties, where we've got the ability to demolish the building and refurbish that square footage elsewhere likely in mixed-use and things other than retail.

Operator

We will take our next question --

Tom O'Hern -- Senior Executive Vice President and CFO

Do you have a follow-up to that Jim?

James Sullivan -- BTIG -- Analyst

Sorry. Tom, am I on?

Tom O'Hern -- Senior Executive Vice President and CFO

Yes, Jim. Yes.

James Sullivan -- BTIG -- Analyst

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

Tom O'Hern -- Senior Executive Vice President and CFO

Too early to put that out there, Jim. I mean, typically you've seen our yields range from 6% to 10%, but it's too early to be specific on this package.

James Sullivan -- BTIG -- Analyst

Okay, very good. Thank you.

Tom O'Hern -- Senior Executive Vice President and CFO

Thank you.

Operator

We'll take our question from Craig Schmidt of Bank of America. Please go ahead, your line is open.

Craig Schmidt -- Bank of America/Merrill Lynch -- Analyst

Hi, I just wanted to talk about the strong same -- strong sales growth. Is that possible to get a comfortable number in the fourth quarter? Or is it tougher comps that may lower that? And then just given this strong sales performance, do you think we'll see a widening of leasing spreads?

Tom O'Hern -- Senior Executive Vice President and CFO

Craig, we typically don't try to predict where sales are going to be. It's obviously been strong the last four or five quarters and there's no reason to think that won't be. In fact it was interesting to note that last week Moody's boosted their retail outlook for -- to positive for the first time in three years and they are speculating it will be a strong holiday season.

So who knows, we're not going to speculate on that. In terms of the leasing spreads, and Doug you can elaborate further, I think we had somewhat of a negative impact as a result of signing 11 renewal deals on some fairly large spaces that weigh on that stat.

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

Doug Healey -- Executive Vice President, Leasing

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

Craig Schmidt -- Bank of America/Merrill Lynch -- Analyst

Okay, thanks.

James Sullivan -- BTIG -- Analyst

Thanks Craig.

Operator

We will now take our next question from Jeremy Metz from BMO Capital Markets. Please go ahead, your line is open.

Jeremy Metz -- BMO Capital Markets -- Analyst

Hey guys. So Tom you mentioned the potential additional of Sears spend here. You have Philly and Scottsdale ongoing, a bit of capital you're still contributing on the west side, you have a new venture with Simon. You guys did a lay out some expectations or proceeds that you expect to get out of Kings, Chandler, Chicago and a few others. But as we think about your sources and uses and your leverage today at over 8 times, how should we think about that trending? And what sort of target range do you want to get back down to and what's the timing expectation to do so?

Tom O'Hern -- Senior Executive Vice President and CFO

All right. So Jeremy the projects you mentioned really stretch out only to 2021. And even when you include Sears in the mix, we're probably talking about $200 million to $250 million spent per year. We'll also have the benefit, I think when you refer to the balance sheet you're probably talking about the single metric of debt-to-EBITDA and we'll also have the benefit of Kings Plaza, EBITDA in our numbers for our full year next year.

Philly will start to come online next year as well as Scottsdale Fashion Square. So we'll have some benefit of the additional EBITDA coming in today on those projects. We've just got the related debt without any EBITDA.

So we'll get a benefit there that will move -- we've actually moved it down a little bit, but if you take a look at an average compounded annual growth rate for us on same center sales and you move that forward from today into 2021 and you look at these projects and you look at the timing of when the EBITDA from the construction projects rolls in, we should actually see a slight decline as a result of all these projects and the natural growth we would expect out of our portfolio going forward.

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

Jeremy Metz -- BMO Capital Markets -- Analyst

And you've been more active on selling some non-core assets. Is that at all part of the plan as you look forward here?

Tom O'Hern -- Senior Executive Vice President and CFO

No, we've gone through periods of time since 2012 when we sold a lot of non-core assets. Recently we announced that we've sold a couple of power centers which were carryovers from the Westcor acquisition in 2012, but that being said, we don't have any dispositions in our guidance. I think we're ready to focus on the portfolio we have in driving same center NOI growth and EBITDA growth.

So I wouldn't expect too many disposition from us in the near future.

Jeremy Metz -- BMO Capital Markets -- Analyst

Thanks Tom.

Tom O'Hern -- Senior Executive Vice President and CFO

Thank you.

Operator

We will now take our next question from Christy McElroy from Citi. Please go ahead, your line is open.

Christy McElroy -- Citi -- Analyst

Hi, guys. Just with regard to the seven Sears stores on the closure list that you have in the Seritage JV, were these negotiated to close pre-bankruptcy? So did you have to pay anything to get the leases back and gain control of the space? Or were you just naturally rejected?

Tom O'Hern -- Senior Executive Vice President and CFO

Well, Christy, they've been put on the closure list. There hasn't been a formal rejection yet. So that's -- it's in the hands of the Bankruptcy Court. It seems like that's a natural place for it to end up, but it's to be determined at this point.

Christy McElroy -- Citi -- Analyst

Okay, got you. So you in terms of being rejected in terms of any consideration that you might have to pay to gain control over lease hold and that's still up in the air?

Tom O'Hern -- Senior Executive Vice President and CFO

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

Christy McElroy -- Citi -- Analyst

Okay. And then just in terms of the LA Outlet Project is your contribution of land part of the pro-rata cost consideration in the 50-50 JV, and can you discuss sort of the split of responsibilities of Simon as you build out that project?

Tom O'Hern -- Senior Executive Vice President and CFO

Yes Christy. This is kind of a unique site. It had been a former landfill and so there's some environmental issues there that are going to be monitored. The city is going to continue to own the land and what we have along with our partner air rights to build above that.

So the city is going through what they have to do on the site work and on-site and off-site work in remediation, and then once they've done that, they'll deliver that to us and we have air rights above that.

And then in terms of responsibilities, I mean we're just going to co-lease it, we're going to co-develop it. I think they're going to do the marketing, we'll do the day-to-day property management. So it really is pretty close to a 50-50 split on responsibilities as well.

Christy McElroy -- Citi -- Analyst

Thank you.

Tom O'Hern -- Senior Executive Vice President and CFO

Thanks.

Operator

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

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Hi, thanks. Just a question for Doug on leasing. Given the improvements that we've seen in retail here more recently, is it safe to assume that based on current conditions we shouldn't see additional relief or package lease sales like you had in the second quarter or tenants that will come in to with those requests?

Doug Healey -- Executive Vice President, Leasing

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

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. And question looking at Kierland Commons, that took a pretty big step up in sales. I know there's been some retenanting there, but just curious if you could speak to what drove the big increase this quarter.

Scott Kingsmore -- Senior Vice President, Finance

Yes. This is Scott. So we've recently added a Tesla to the project and so that's causing some increases. Kierland is always operated a very healthy growth clip independent of that, but I think Tesla is probably one of the catalyst for that.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Got it. And if last question on the lease accounting changes that will be implemented in January I think there were some debate over or how they would be sort of allocated or how they would hit the P&L. Is there any additional clarity around that?

Scott Kingsmore -- Senior Vice President, Finance

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

Todd Thomas -- KeyBanc Capital Markets -- Analyst

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

Scott Kingsmore -- Senior Vice President, Finance

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

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay, got it. Thank you.

Operator

We will now take our next question from Alexander Goldfarb of Sandler O'Neill. Please go ahead, your line is open.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Hey, Tom. How are you. So it sounds like we get a question and a follow-up is what it sounds like. So the first question is I realize it's getting toward year-end and probably more thoughts around 2019, but just going to the same-store guidance reduction this year, you guys reduced the lease term income that you expected on your second quarter call and the lease term income that you're expecting now is pretty much the same that you revised down to last time.

So what is the driver of the change in the NOI guidance for this year ex-lease term if last quarter you forecasted $15 million for the year, this quarter you're forecasting $14 million. I mean does $1 million make that much of a difference of 50 basis point difference, or is there something else going on in the reduction?

Scott Kingsmore -- Senior Vice President, Finance

Yeah, Alexander. This is Scott. I'll go ahead and take that one. So as I mentioned in my opening remarks, the gross dollar change as a result of the change in same center is really not that material. It's $2.5 million. It's comprised of nearly $0.01 of termination income decline. It's a reassessment of where we stand today relative to our bad debt exposure and we bumped that up $1 million, so it's about $2.5 million. That simply drives the same center metric including termination fees down 30 basis points.

So it doesn't take a lot of movement in terms of basis points to drive a very small dollar result. So just keep it in mind it's not that consequential but, --

Tom O'Hern -- Senior Executive Vice President and CFO

And I think what's really relevant here is the acceleration of the same center, I mean, people getting hung up because of what effectively is a 5 basis point shift in same center growth excluding term fees. Term fees are down, that's always a guess with midterm fees of $21 million in '16, $22 million in '17, I think that's what we used as our estimate for '18 and we've trimmed that over the course of the year.

But we have seen the acceleration in same center, in the third quarter we told we think it's going to be north of 3% in the fourth quarter and if you exclude lease term fees, it's even higher than that. So that's the real story there. That minor reduction is pretty immaterial.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Okay. And the second one is on the new Simon JV for L.A. Premium outlets, does this mean a potential revisitation of Candlestick and perhaps you and Simon would JV on Candlestick premium?

Tom O'Hern -- Senior Executive Vice President and CFO

I mean, certainly we're open to doing other joint ventures with them. We've been joint venture partners going back years ago when we did the IDM portfolio together, and what we're really focused on today is the Carson project and it doesn't mean there won't be others in the future but right now that's what we're focused on as partners.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Okay, thank you Tom.

Tom O'Hern -- Senior Executive Vice President and CFO

Thanks Alex.

Operator

We will now take our next question from Linda Tsai from Barclays. Please go ahead, your line is open.

Linda Tsai -- Barclays -- Analyst

Hi. How does the Apple at Scottsdale differ from the one at Broadway Plaza? On the last call you noted that the Broadway Plaza has the new Apple format (ph), does Scottsdale too?

Doug Healey -- Executive Vice President, Leasing

Linda, it's Doug. The Apple at Scottsdale is a two flagship, it's 15,000 square feet whereas the one at Broadway is smaller than that and it sits alone, so I guess the real answer is Scottsdale is their flagship. And their flagships are very few and far between.

Tom O'Hern -- Senior Executive Vice President and CFO

Linda, hopefully you'll be joining us for the tour at Broadway Plaza next week, and if you take a look at that store which is also a great store. Great looking, relatively unique in the shape of an iPhone.

Linda Tsai -- Barclays -- Analyst

Wow! I'll be there, and I look forward to it. The occupancy for your group four and five malls were up quite a bit, up 110 bps and 240 bps respectively. Can you talk a little bit about what drove that and if you expect these increases to continue?

Tom O'Hern -- Senior Executive Vice President and CFO

Yes. I think a lot of it is. We're finally getting some leasing momentum for the legacy retailers. I mean a lot of the emerging brands and digitally native retailers don't focus on that group of assets. But we have seen additional leasing happening the last couple of quarters at the legacy retailers and that's helped to benefit those assets in particular.

Linda Tsai -- Barclays -- Analyst

And then the $1 million increase in bad debt expense for guidance was that due to the five bankruptcies in 3Q you referred to earlier? And then overall, do you expect bad debt expense to be down year-over-year in '19?

Scott Kingsmore -- Senior Vice President, Finance

Yeah, Linda. Hi, this is Scott. I'm not sure that we can point to any one specific instance that gave rise to the increase 5 to 6, it's -- we look at it holistically across the portfolio each and every quarter. So it's a lot of small numbers that end up aggregating and as you get more clarity as you go through the year, sometimes you need to adjust up or down. I think --

Tom O'Hern -- Senior Executive Vice President and CFO

It's been amazingly consistent year-over-year.

Scott Kingsmore -- Senior Vice President, Finance

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

Tom O'Hern -- Senior Executive Vice President and CFO

If have to go back to 2014 it was $5 million; 2015, $5.4 million; 2016, $4.5 million; 2017, $5.8 million. This year we've got it in $6 million. So we'll probably move a little bit, Linda. I mean we're not giving guidance on '19, my guess is, it would move down, but not significantly.

Linda Tsai -- Barclays -- Analyst

Thanks.

Operator

We will now take our next question from Wes Golladay of RBC Capital Markets. Please go ahead, your line is open.

Wes Golladay -- RBC Capital Markets -- Analyst

Hi, everyone. I just wanted to go back to the retail sales environment. It definitely seems to be improving. I just want to know if it's broad-based, if you could maybe comment on how the bottom end of your tenants are doing, call it the ones that have a 20% plus occupancy cost. How does that list compare versus maybe a year ago?

Doug Healey -- Executive Vice President, Leasing

Hi. It's Doug. The mood is definitely changing and by way of example, 18 months to 24 months ago, we meet with retailers all the time, and the conversations revolved around traffic being down in the malls and online shopping killing the mall business, but fast forward 18, 24 months we're still having the same conversations, but these conversations are much different. They're more about -- the tenants are talking about their products and they're talking about the services they're providing. They're talking about their experience.

They're talking about their marketing and their social media and their influencers. So I think they took the successful retailers, the ones that are performing today took the last couple of years to really reinvent themselves, to figure out the revised shopping patterns and to figure out the new customer which is the millennial and the Gen Z.

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

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

Wes Golladay -- RBC Capital Markets -- Analyst

Okay, thanks a lot.

Operator

We'll now take our next question from Samir Khanal from Evercore. Please go ahead, your line is open.

Samir Khanal -- Evercore -- Analyst

I know you haven't provided guidance for '19 but can you just help us walk -- help us through how to think about sort of capitalized interest for '19 and maybe the impact of sort of interest expense as we kind of formulate our views for next year?

Scott Kingsmore -- Senior Vice President, Finance

Yes Samir. Hi, it's Scott here. I think you would find that as we look at '17 to '18 capitalized interest was relatively consistent. As our weighted average interest rate ticks up, which we do expect that to continue into 2019, you'll find a slight increase that correlates with capitalized interest. I think the big wildcard here is the pace at which the Sears stores come back to us.

Bear in mind that once those stores do come back, we will be putting into play the redevelopment plans that we have on the shelf, ready to go. And once we do that, we will be capitalizing interest on any cost or basis associated with those stores. So that's probably the wild card. It's hard to estimate at this point in time given the uncertainty as to when those stores will be coming back.

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

Samir Khanal -- Evercore -- Analyst

Okay. And I guess as a follow-up, I mean, even on the termination fee which is also sort of a wild card, but it sounds like you think the environment sort of feels better, I mean is it fair to assume that, that number sort of stays the same or even could come down slightly from where you are this year?

Scott Kingsmore -- Senior Vice President, Finance

Yes sure, Samir. If you look at our history, we probably have a floor that I would peg it around $10 million or so. So for $14 million today $10 million tomorrow and the occupancy environment appears to be healthier. I would say it's probably realistic that we'll finish somewhere in between there, again, I'm obviously not giving guidance to 2019, but that's probably a realistic assumption that we land somewhere in between those two numbers in 2019.

Samir Khanal -- Evercore -- Analyst

Got it. Okay, thanks guys.

Scott Kingsmore -- Senior Vice President, Finance

Thank you.

Operator

We will now take our next question from Michael Mueller of JPMorgan. Please go ahead. Your line is open.

Michael Mueller -- JPMorgan -- Analyst

Yeah. Tom, I was wondering -- good afternoon. What were some of the biggest factors that prompted you to bring Simon into the Carson City development? I mean you obviously did Chicago on your own and that's doing $800 a foot?

Tom O'Hern -- Senior Executive Vice President and CFO

Hi, Mike, yeah, it's a variety of things, look, they're the biggest in the outlet business, they're a great partner, we have a long history with them. It's a big project, we haven't put the dollars out there yet, but it's going to be well over 400,000 square feet.

So it's safe to assume the total cost is going to be well over $400 million. So its share in the capital is a positive. It's an environmentally challenged site, but we just think the benefit of both firms working on that project together bringing our best efforts and our best people it's going to have a great outcome.

So that's why we did the -- made the decision, and you'll also recall Michael, we did Chicago, we did have a partner at that time, we ultimately bought them out, but we did have a partner, 50-50 partner at that time.

Michael Mueller -- JPMorgan -- Analyst

Okay. That was it. Thanks.

Tom O'Hern -- Senior Executive Vice President and CFO

Thank you.

Operator

And we'll take our next question from Tayo Okusanya of Jefferies. Please go ahead, your line is open.

Omotayo Okusanya -- Jefferies -- Analyst

Yes, good afternoon. Along those same lines of questioning, so it will be taken this as a sign that as you look -- as we look going forward, you guys definitely want to be a bigger player in the outlet business?

Tom O'Hern -- Senior Executive Vice President and CFO

Tayo, we've said for years that we're not going to do a lot of these, it's going to to be really urban locations and unique locations. We're not going to really try to go out there and make it 20% of our business or probably even 10% of our business as it relates to NOI but when we can find a unique location like Chicago or Los Angeles, this is a tremendous piece of real estate. It's on the 405 Freeway just south of the 110 Freeway.

There's about 300,000 cars go by in a day, usually very, very slowly because it's bumper-to-bumper in Los Angeles, 24/7. And it's a great location. So L.A. is underserved as it relates to the outlet business and we think it's a great location. We think it's a great partner and it's going to be a tremendous project.

Omotayo Okusanya -- Jefferies -- Analyst

Okay. That's very helpful. And then in regards to merchandising mix could you talk a little bit about that? I mean, our understanding is that there might be radius restrictions at Citadel (ph) fashion outlets?

Tom O'Hern -- Senior Executive Vice President and CFO

I'm not sure radius restrictions are going to be a real big issue for us. It's quite a distance from the Citadel and the next closest outlet centers or about 50 miles away, and that can be two hours in L.A. traffic, one Cabazon to the south and then Camarillo to the North.

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

Omotayo Okusanya -- Jefferies -- Analyst

Excellent, thank you.

Tom O'Hern -- Senior Executive Vice President and CFO

Thank you, Tayo.

Operator

We will now take our next question from Caitlin Burrows of Goldman Sachs. Please go ahead, your line is open.

Caitlin Burrows -- Goldman Sachs -- Analyst

Hi, good morning there. You guys have consistently reported pretty strong sales growth, but it seems like market rents have kind of plateaued and occupancy cost is now the lowest it's been since like 2012, so I was just wondering are the occupancy cost retailers are willing to pay lower than before? Or do you think it has to do with the mix of the types of tenants you're working with? Or do you think kind of market rents and occupancy expense, sorry -- occupancy cost will go back up some.

Tom O'Hern -- Senior Executive Vice President and CFO

Well, I think it's a function of tenant sales growth has outpaced the rent bumps. So we're back in that situation which is actually very favorable. We think we're going to continue to be able in our leasing efforts to push rate to try to move that occupancy cost as a percentage of sales higher. But I think it's really mathematically really a function of the tenants growing at a 7% pace and the rents not moving up that fast.

Caitlin Burrows -- Goldman Sachs -- Analyst

Okay, got it. And then just may be on the Scottsdale Fashion Square redevelopment. Could you give us some more details on the timing there? It just seems like with the series of upgrades that you're doing, how long you will expect that to take to reach the stabilized yields?

Tom O'Hern -- Senior Executive Vice President and CFO

Go ahead, Scott.

Scott Kingsmore -- Senior Vice President, Finance

Caitlin hi, this is Scott. So again this is a multi-phased project right? So as we repurposed the Barney's box Apple is open, we just mentioned that. Industrious will be opening their co-working facility of approximately 35,000 square feet in January I believe Doug? Is that correct?

Doug Healey -- Executive Vice President, Leasing

Yes.

Scott Kingsmore -- Senior Vice President, Finance

We will expect the peripheral tenants on the 80,000 square-foot expansion of the outside to start to open in fall of '18, but frankly that will continue all the way through the end of 2019. There may be an opening that spills into '20, so it's going to be relatively well distributed throughout 2019.

Caitlin Burrows -- Goldman Sachs -- Analyst

You just mentioned the fall of '18 like now or you meant the fall of '19?

Scott Kingsmore -- Senior Vice President, Finance

I'm sorry. Fall of '19, I'm a year off.

Caitlin Burrows -- Goldman Sachs -- Analyst

Okay. They will start opening in fall, like a year from now but it will continue taking longer than that.

Scott Kingsmore -- Senior Vice President, Finance

Yes. So let me clarify Caitlin. And we've got a pad significant restaurant use that I think will resonate great in the market, that will open in fall of '18, the balance of the exterior exterior tenancies though will really be sprinkled throughout '19 probably clustered toward fall of '19.

Tom O'Hern -- Senior Executive Vice President and CFO

That's correct Scott. And as you mentioned earlier it will trickle into the beginning of 2020.

Caitlin Burrows -- Goldman Sachs -- Analyst

Okay, thanks.

Tom O'Hern -- Senior Executive Vice President and CFO

Thanks, Caitlin.

Operator

We will now take our next question from Rich Hill of Morgan Stanley. Please go ahead, your line is open.

Richard Hill -- Morgan Stanley -- Analyst

Hey. Thank you, guys. I wanted to go back to your prepared remarks and maybe ask a couple of questions about the micro pop-ups in the common areas. So, hoping you could maybe share a little bit about how rents compare relative to in line space, maybe how much of an uplift that's providing to total NOI? And then, finally do you expect to make it you know, these more permanent?

Doug Healey -- Executive Vice President, Leasing

It's Doug. Yes. I think that's the goal. The micro stores are obviously smaller. We were talking about UNTUCKit in the common area. They won't have quite the amount of merchandise, but they'll have just enough merchandise in the right merchandise given the market to really test the market in the mall.

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

Richard Hill -- Morgan Stanley -- Analyst

Got it. So maybe more of an incubator than a real uplift to immediate NOI is that sort of the way we should be thinking about it?

Doug Healey -- Executive Vice President, Leasing

That's fair.

Richard Hill -- Morgan Stanley -- Analyst

Okay. Great guys. And then, just one more question, it looked like overage rents or maybe up a little bit more than we were expecting a recognized 3Q 2018 is seasonal. But is the higher than at least we were expecting the overage rents reflective of the improving sales environment that you've spoke of and do you sort of expect overage rents to continue to trend higher on a quarter-over-quarter basis?

Scott Kingsmore -- Senior Vice President, Finance

Yes, Rich. Hi, this is Scott. I think we would expect it to be relatively consistent, you know I think we've mentioned in the past that percentage rent is a difficult one to determine. If you're doing your job right, you're rolling percentage rent into fixed minimum rent and so you'll see a natural migration as you roll over leases to more a fixed rent based structures, but on occasion, you'll have gross deals where tenants pay percent of sales and that's -- it's really somewhat hard to predict.

It's hard to correlate, bottom line is it's hard to correlate 7% sales growth with percentage rent because not every tenant that is driving that sales growth is actually paying overage rent. So you know, generally I don't think you can underwrite anything about the sales trends into the future. I don't see it as a declining revenue source but it's frankly not a significant one. I think, I'd underwrite it is relatively flat and consistent.

Richard Hill -- Morgan Stanley -- Analyst

Yes, that's very helpful. Thank you for answering my other question. That's all I had, guys. Thank you.

Doug Healey -- Executive Vice President, Leasing

Thanks Rich.

Operator

We will now take our next question from Jim Sullivan of BTIG. Go ahead, your line is open.

James Sullivan -- BTIG -- Analyst

Sure. Thanks. Tom, maybe I'm going to take another swing at this same issue that I asked you about initially earlier in the call and, you know, let me just start by kind of making a statement that you know Macerich is not alone in stating that they have plans to develop plans for Sears boxes and as we all know this is something that has been a long time coming and particularly in Macerich's case you have -- you're getting back boxes, which are in some of the most productive centers in the country.

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

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

When you bring in you know, a variety of smaller tenants. So maybe if you could just address, I'm just trying to find out how specific are these plans? And on the cost side, you know, just how thoroughly detailed and prepped are you on that $250 million to $300 million number?

Tom O'Hern -- Senior Executive Vice President and CFO

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

So until we know the ultimate outcome we're not going to get too specific on exactly what we're going to do. We know exactly what we're going to do, our partner knows exactly what we're going to do, most of these are joint ventures be it with Seritage or others, but we're very specific, but it would be inappropriate to be putting forth return hurdles at this point until we actually have control of those boxes.

James Sullivan -- BTIG -- Analyst

Okay. And then a kind of a follow-up on that question. As you've identified that's only for a segment of the current 21 Sears boxes that you have, if we were to be very simplistic, if Sears were to liquidate and move toward closing all their stores by the middle of next year, should we simplistically assume that that $250 million to $300 million number gets doubled?

Tom O'Hern -- Senior Executive Vice President and CFO

No, I wouldn't assume that. That's a pro-rata share. That touches every single Sears in the first two groups. What is not included by that Jim is the five locations that are owned by either Seritage or Sears. We don't know the outcome of those, it's going to depend on the price whether we're interested in buying those boxes or not.

James Sullivan -- BTIG -- Analyst

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

Tom O'Hern -- Senior Executive Vice President and CFO

This is not the joint venture assets we have with them but there're five others.

James Sullivan -- BTIG -- Analyst

I understand.

Tom O'Hern -- Senior Executive Vice President and CFO

(multiple speakers) specific dues Superstition Springs, and I think Desert Sky.

James Sullivan -- BTIG -- Analyst

Okay, very good. Thank you.

Tom O'Hern -- Senior Executive Vice President and CFO

Thanks Jim.

Operator

It appears there are no further questions.

Tom O'Hern -- Senior Executive Vice President and CFO

Well, thank you everyone. We appreciate you joining us today on this call. We look forward to seeing many of you next week in San Francisco at NARIET. Thank you.

Operator

That concludes today's call. You may now disconnect.

Duration: 54 minutes

Call participants:

Jean Wood -- Vice President of Investor Relations

Tom O'Hern -- Senior Executive Vice President and CFO

Scott Kingsmore -- Senior Vice President, Finance

Doug Healey -- Executive Vice President, Leasing

James Sullivan -- BTIG -- Analyst

Craig Schmidt -- Bank of America/Merrill Lynch -- Analyst

Jeremy Metz -- BMO Capital Markets -- Analyst

Christy McElroy -- Citi -- Analyst

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Linda Tsai -- Barclays -- Analyst

Wes Golladay -- RBC Capital Markets -- Analyst

Samir Khanal -- Evercore -- Analyst

Michael Mueller -- JPMorgan -- Analyst

Omotayo Okusanya -- Jefferies -- Analyst

Caitlin Burrows -- Goldman Sachs -- Analyst

Richard Hill -- Morgan Stanley -- Analyst

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