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Macerich Co  (NYSE:MAC)
Q4 2018 Earnings Conference Call
Feb. 07, 2019, 1:00 p.m. ET

Contents:

Prepared Remarks:

Operator

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

Jean Wood -- Vice President of Investor Relations

Thank you for joining us today on our fourth quarter 2018 earnings call. During the course of this call, we will be making certain statements that may be deemed forward-looking within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially due to a variety of risks, uncertainties and other factors. We refer you to today's press release and SEC filings for a detailed discussion of forward-looking statements. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included in the earnings release and supplemental filed on Form 8-K with the SEC, which are posted in the Investors section of the Company's website at macerich.com.

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

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

Scott Kingsmore -- Executive Vice President, Chief Financial Officer and Treasurer

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

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

Year-end occupancy was 95.4%, up 40 basis points from year-end '17 and up 30 basis points from September 30, 2018. Half of this gain of 40 basis points was temporary occupancy. Same-center growth net operating income, excluding lease termination revenue was up 4.2% for the quarter were 2.4% increase when including lease term revenue. During the quarter, we did realize a favorable multi-year tax appeal at one of our wholly owned assets, which equates to roughly 150 basis point improvement to quarterly growth.

For the second half of 2018, we experienced 4% growth versus the second half of 2017, when excluding lease termination revenue and 3.4% growth including lease termination revenue. The property operating margins for 2018 improved by 60 basis points to 70% up from 69.4% for 2017. And REIT G&A and Management Company expenses collectively showed about a $2.3 million improvement or reduction during the quarter.

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

One, we anticipate approximately $0.10 of accretion from year-over-year savings in corporate overhead from our 2018 reduction in force and from other G&A reductions all net of tax.

Two, we expect approximately $0.12 of dilution as a result of increasing interest expense in 2019, driven primarily by increasing LIBOR and the impact of refinancings and higher rates.

Three, we expect approximately $0.08 of dilution from lost rents from anchor lease terminations, primarily from Sears. This is of course short-term cash flow dilution, while we execute on long-term value creating opportunities within what is generally very well situated real estate. As of the end of 2018, several Sears stores had closed, but none of the Sears leases have been rejected to date and we have assumed rents for only the month of January for those close locations. Depending upon what actions are taken by Sears and by the bankruptcy judge, this assumption could prove to be conservative.

Four, we expect approximately $0.04 of dilution from the combination of reduced lease termination revenue, straight-lining of rents and SFAS 141 income.

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

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

And lastly, more details of the guidance are obviously included within our 8-K supplemental financial information that was reported this morning.

On to the balance sheet. As we highlighted for you, last quarter, we expect to raise between $425 million to $450 million in liquidity from the Company's mortgage refinancing activity during 2019. In early January, we closed on a $300 million, 12-year fixed rate financing on Fashion Outlets or Chicago at a fixed rate of 4.58%. This transaction yielded $100 million of incremental proceeds which were used to repay a portion of the Company's line of credit.

We are now close to entering into a commitment for $220 million, 10-year fixed rate financing on SanTan Village in Gilbert, Arizona, which we anticipate closing in the second quarter. This transaction would yield roughly $85 million of incremental liquidity. We are currently marketing Chandler Fashion Center in Chandler, Arizona for long-term fixed rate financing of that market dominant Class 8 regional shopping center. And then later this year, we plan to refinance Kings Plaza. Our product continues to be very much in favor within the debt capital markets.

With that, I will turn it over to Doug to discuss the leasing and operating environment.

Doug Healey -- Executive Vice President, Leasing

Thanks, Scott. In the fourth quarter, sales and occupancy remained strong and leasing velocity continued. Portfolio sales ended the fourth quarter at $726 per square foot, which represented a 10% increase on a year-over-year basis. Economic sales per square foot, which are weighted based on NOI, were $849 per square foot and that's up from $770 per square foot a year ago.

Occupancy was 95.4% and this represented a 40 basis point increase year-over-year. Trailing 12-month leasing spreads were 11.1% compared to 10.8% at September 30, 2018 and 15.2% for the year 2017. These leasing spreads included 32 leases with rent reductions at lease expiration. Excluding these 32 rent reductions leasing spreads would have been closer to 13%. Average rent for the portfolio was $59.9 per square foot, and that's up 3.7% from $56.97 per square foot a year ago.

Leasing, volumes were strong during the fourth quarter 279 leases were executed for a total of 984,000 square feet, bringing the total activity for 2018 to 825 executed leases for a total of just over 3 million square feet. Notable leases signed in the fourth quarter include Google at Westside, Nordstrom at Country Club Plaza, a flagship Tesla at Santa Monica Place, Dick's Sporting Goods at Deptford, Dave & Buster's at Vintage Fair; and Crayola Experience at Chandler Fashion Center.

We also had a very significant opening in the fourth quarter and that was the luxury wing at Scottsdale Fashion Square. And we also opened a concept called brand box at Tysons Corner. Brand box is a first of a kind technologically induced venue that provides flexible space for emerging brands to test bricks and mortar.

At 10,000 square feet brand box opened a 100% occupied with five emerging brands and one legacy brand, who is looking to reinvent themselves. We are already talking to three of the brands to do a permanent long-term deal, elsewhere in the center, which of course is our ultimate goal. In addition, we opened 13 emerging brands in the fourth quarter. Notables include Bonobos at The Village at Corte Madera, stands at Washington Square and Madison Reed and Invisalign at Broadway Plaza.

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

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

Traditional retailers that continue to reinvent themselves and focus on their product, their service, their experience, are thriving. Great examples are Apple, American Eagle, Hollister, Vans and Sephora. Boxes restaurant fitness, theater, entertainment, experiential and international brands are all active. Our shoppers, especially the millennials and the Gen Zs, they want it all, they want the right stores, they want food and beverage, they want esthetics, they want to be served and they want to be entertained. And that's exactly what we're focused on at the property level.

From our store selection to the service we provide to the experiences we create Macerich continues to be an industry leader. And lastly, I recently came across what I thought was very interesting article written by the ICSC. In 2018, the ICSC commissioned an outside strategy and research firm to conduct a study that tracked retail web traffic and consumer brand awareness among emerging and established brands. The study is titled the Halo Effect, How Bricks Impact Clicks.

I'm sure many of you have read the study, but for those who haven't, I would strongly encourage you to do so. In the meantime, I'd like to point out four big takeaways. Number one, for existing retailers opening one new physical store in a market results in an average 37% increase in overall traffic to that retailer's website. Number two, increasing the number of physical stores by just 5% in a single market has significant benefit and digital engagement and web traffic. Number three, for emerging brands, new store openings drive an average 45% increase in web traffic following store opening.

But the opposite is also true. Web traffic drops when retailers closed stores. And one retailers case the share of web traffic across markets where they closed declined up to 77%.

So in conclusion, existing retailers have incentive to expand into new markets or to expand within existing markets. Existing retailers have reasons other than cost of occupancy to keep stores open in key markets and in key shopping centers. And lastly, and most importantly, it is now proven that emerging brands have all the incentive in the world to open physical stores.

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

Thomas E. O'Hern -- Chief Executive Officer and Director

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

As Doug mentioned, we continue to see the leasing term change mostly for the positive, legacy brands are clearly differentiated between those who continue to invest in their brand and product, their in-store experience and into their omni-channel strategies versus those that are struggling, mainly because of the weight of historical leverage buyouts and related balance sheet issues.

While we continue to see an improved leasing environment with generally strong retail sales, we do remain concerned over certain brands. Being able to recapture unproductive department store boxes within great malls will continue to provide significantly redevelopment opportunities for us. We have two compelling recent examples of that in Kings Plaza, where we took an underproductive Sears store and replaced it was Zara, Burlington, Primark, JCPenney, which collectively will do 5 times the sales of the prior tenant.

At Scottsdale Fashion Square where we replaced the Barneys department store with Apple and Industrious. You will see us do upgrades at other centers where we have the opportunity to recapture department stores. There is also demand for adding mixed use including residential, hotel, entertainment, health and wellness and office components. These are compelling opportunities for us to diversify our cash flow sources over the course of the next five years.

Looking at a prime example of this is Scottsdale Fashion Square where development continues on our 80,000 square foot exterior expansion, which includes restaurants and well recognized high end fitness club. The expansion is 100% leased and includes a tremendous collection of high-end restaurants, including Nobu, Ocean 44, Farmhouse and other. Within the form of Barneys location, we opened a two level flagship Apple store, which features extensive experiential and educational elements.

In January, two weeks ago Industrious and National co-working operator opened 33,000 square foot premium co-working space. It was the best opening they've ever had, and far exceeded their typical opening day occupancy.

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

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

Turning now to Fashion District of Philadelphia. Construction continues on a four-level retail and entertainment hub spanning over 800,000 square feet in the heart of downtown Philadelphia. We've signed leases or commitments from 85% of the leasable area, notable tenants include Century 21, Burlington, H&M, Nike, Forever 21, AMC, Round One and City Winery.

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

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

Last quarter, I shared details as to our remaining Sears stores. I'll briefly update you on the current status. We have 21 Sears stores and they're broken into different ownership group. The first group is nine Sears stores that are owned in a 50-50 joint venture with Seritage, six of those nine are now closed and the three remaining opened appear to be part of the Sears going concern portfolio, which includes Arrowhead, Denbury and Freehold. Both Danbury and Freehold, already have been 50% converted to smaller Sears footprints by virtue of leasing the space Primark.

These nine stores or some of our best malls with average sales over $800 per foot. And we have plans for all these locations with a wide range of opportunities including demolishing the box and repurposing the square footage with more productive uses. At this time, all those six of these are closed, none of these leases have been rejected. So as of today, we do not control these locations yet.

Moving onto the second group. Seven of the Sears locations are owned by Macerich and are leased to Sears for a very nominal rent. Of those seven stores, four are closed and three remain open in appear to be part of the Sears going concern 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 those five, three are closed and only Inland and Pacific view remain open.

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

As Scott mentioned, we've assumed a significant rent loss within our 2019 guidance for anchored terminations, the majority of which pertains to Sears.

In closing, as we move into 2019, we're looking forward to continued progress on our redevelopment opportunities, we are encouraged by the improved leasing environment and tone, but keeping in mind that we also see retailers that are not going to make it through the year with that

closures, including some big names that have filed bankruptcy within the past two weeks.

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

Questions and Answers:

Operator

Thank you (Operator Instructions) We'll take our first question Jim Sullivan of BTIG. Please go ahead.

Jim Sullivan -- BTIG -- Analyst

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

Thomas E. O'Hern -- Chief Executive Officer and Director

Well, part of it, Jim is the comp period. And as you mentioned, we had softer same-center in the first two quarters of '18 stronger and the second half, so that would mean the second half of '19 would be facing tougher comps. Also, it remains to be seen, not quickly, we will get some of these stores back. So for example, the three tenants that filed bankruptcy within the last two weeks, Gymboree, Charlotte Russe and Things Remembered, collectively have 90 stores with us.

And we're not sure how many of those stores will close or how much rent concession will be requested by those tenants and those are could be first half of the year impact. So Scott, unless you have a different opinion, I'd say, that we'll probably be fairly consistent through the year in terms of the same-center numbers.

Scott Kingsmore -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah, I would agree, Tom, as the biggest wildcard is the bankruptcies and are in front of us, which are likely to be weighted toward latter three quarters, given the fact were in that February today, Jim.

Jim Sullivan -- BTIG -- Analyst

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

Doug Healey -- Executive Vice President, Leasing

Yes, Jim, it's Doug. That's exactly right.

Jim Sullivan -- BTIG -- Analyst

Okay, great. Thank you.

Operator

(Operator Instructions) Then I take our next question from Samir Khanal of Evercore. Please go ahead.

Samir Khanal -- Evercore -- Analyst

Hey, good afternoon, guys. Scott or Tom, I guess, could you just maybe help us better understand the range of sort of $350 million to $358 million on FFO. What are some of the biggest swing factors that get you off the midpoint either to the low-end or the high end of that range? And also maybe to the extent you could maybe help us think about where consensus was wrong, maybe coming into the guidance release here?

Thomas E. O'Hern -- Chief Executive Officer and Director

Yeah, sure, Samir. I think we mentioned a couple of things in the prepared remarks that could swing either way. The timeliness of when Sears rejects leases, certainly dictating factor. We have assumed that the lion share of our Sears portfolio stops paying rents as of February 1, so that could prove to be conservative. Obviously, there's proceedings going on right now and we'll see how that shakes out.

We mentioned the tenant bankruptcies and dependent upon the volume of closures and the timeliness of those proceedings that could certainly influence the range like termination income is always one of those, that's hard to peg we provided guidance that it's estimated at $12 million, which is down from the last few years. So that's certainly a factor. And Samir, I apologize, what was the second part of your question?

Samir Khanal -- Evercore -- Analyst

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

Thomas E. O'Hern -- Chief Executive Officer and Director

Yeah, sure. Let me touch on a few things. Obviously, we've been clear about our perspective on interest rates being a headwind. So we provided succinct disclosure in terms of what those figures are. But elsewhere, obviously, same-center is surprise relative to where, I know you guys modeled. So that should be factored in. The anchor closures and we provided our year-over-year impact at $0.08 of dilution in 2019, that's going to be a factor. We obviously sold a few centers in 2018, there's going to be a carry-forward dilutive impact we've commented on that, that could be an area.

And then I would say, lastly 2019 is a relatively light year in terms of contributions from our redevelopment pipeline. And we've got some accretion from projects Philly and Kings, but bear in mind that Philadelphia as a late in the year opening and there's going to be some ramp to the openings there through the mid part of 2020, Kings Plaza came online during the middle of '18, so part of the accretion from that project was felt already. And then cutting the other way, we have projects such as Westside Pavilion which is obviously winding down. Paradise Valley which we continued to lease on a short-term basis to give us maximum controlled to redevelop that site. So some of those factors kind of cut the other way.

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

Samir Khanal -- Evercore -- Analyst

Yeah, just as a follow-up, I mean, we've seen strong increase in sales, but it doesn't look like it's translated into percentage rents here, how should we think about that line item for '19?

Scott Kingsmore -- Executive Vice President, Chief Financial Officer and Treasurer

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

Samir Khanal -- Evercore -- Analyst

Okay, thanks guys.

Scott Kingsmore -- Executive 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 go ahead.

Craig Schmidt -- Bank of America -- Analyst

Yeah. Great, thank you. I was wondering how much of a drag on the same center NOI is related to the restructuring of the leases versus just vacant space?

Scott Kingsmore -- Executive Vice President, Chief Financial Officer and Treasurer

Craig, this is Scott. We mentioned a few factors. There was a significant retailer that we did upon lease expiration had probably upwards of 20 agreements that we ended up restructuring. It's a retailer that typically occupies a bigger footprint. And those were generally not closures. They were in the most impactful instances downsizing to enable us to reposition that real estate with retailers that we think will perform significantly better. So there is that factor.

And then, in terms of our estimates for potential fallout from bankruptcies, for instance, there are some closures that we're aware of at this point in time, as a result of going out of business sales from the retailers that have already filed. But then on top of that, there's just a general estimate for what is likely to be a rent restructuring.

Thomas E. O'Hern -- Chief Executive Officer and Director

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

Craig Schmidt -- Bank of America -- Analyst

Okay, that's helpful. And then just the cadence of store closings in the mall specialty space has been pretty active in the first part of -- the first 6 weeks of '19. Are you expecting that to maintain that or would it will start to trail off just given the overall strength of the consumer?

Thomas E. O'Hern -- Chief Executive Officer and Director

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

Craig Schmidt -- Bank of America -- Analyst

Thank you.

Operator

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

Todd Thomas -- KeyBanc Capital Markets -- Analyst

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

Scott Kingsmore -- Executive Vice President, Chief Financial Officer and Treasurer

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

Thomas E. O'Hern -- Chief Executive Officer and Director

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

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. But that 100 basis point speculative question, I guess that includes additional activity in addition to the change that you're -- you've discussed. Is that correct?

Scott Kingsmore -- Executive Vice President, Chief Financial Officer and Treasurer

That's correct, Todd.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. And then just back to Sears. So on the anchor rent loss, if I'm not mistaken, it sounded like you assume the February 1 liquidation of Sears altogether, but there's -- you have 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 Kingsmore -- Executive 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 Thomas -- KeyBanc Capital Markets -- Analyst

Okay, that's helpful. All right. Thank you.

Operator

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

Jeremy Metz -- BMO 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'Hern -- Chief Executive Officer and Director

Yes. 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 Metz -- BMO 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'Hern -- Chief 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 Metz -- BMO Capital Markets -- Analyst

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

Thomas E. O'Hern -- Chief 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 Goldfarb -- Sandler 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'Hern -- Chief 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 Kingsmore -- Executive 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 Goldfarb -- Sandler 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 Kingsmore -- Executive 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 Goldfarb -- Sandler O'Neill -- Analyst

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

Scott Kingsmore -- Executive Vice President, Chief Financial Officer and Treasurer

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

Alexander Goldfarb -- Sandler 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'Hern -- Chief 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 Goldfarb -- Sandler O'Neill -- Analyst

Okay, thank you.

Thomas E. O'Hern -- Chief Executive Officer and Director

Thank you.

Operator

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

Christy McElroy -- Citi -- 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 Kingsmore -- Executive 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 McElroy -- Citi -- Analyst

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

Scott Kingsmore -- Executive Vice President, Chief Financial Officer and Treasurer

Correct.

Christy McElroy -- Citi -- 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 Kingsmore -- Executive 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 McElroy -- Citi -- Analyst

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

Thomas E. O'Hern -- Chief 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 McElroy -- Citi -- Analyst

Got it. Okay, thank you.

Operator

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

Brian Hawthorne -- RBC 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 Healey -- Executive Vice President, Leasing

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

Brian Hawthorne -- RBC Capital Markets -- Analyst

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

Doug Healey -- Executive Vice President, Leasing

No, it's pretty consistent.

Brian Hawthorne -- RBC Capital Markets -- 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 Healey -- Executive 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 Hawthorne -- RBC 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 Healey -- Executive 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 Hawthorne -- RBC Capital Markets -- Analyst

Okay. Thanks for taking my questions.

Thomas E. O'Hern -- Chief Executive Officer and Director

Thank you.

Operator

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

Linda Tsai -- Barclays -- 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 Kingsmore -- Executive 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 Tsai -- Barclays -- Analyst

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

Scott Kingsmore -- Executive Vice President, Chief Financial Officer and Treasurer

One retailer.

Linda Tsai -- Barclays -- 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 Kingsmore -- Executive Vice President, Chief Financial Officer and Treasurer

None, that we're aware of.

Doug Healey -- Executive Vice President, Leasing

Correct.

Linda Tsai -- Barclays -- Analyst

Thanks.

Operator

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

Jeff Donnelly -- Wells 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'Hern -- Chief 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 Donnelly -- Wells 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'Hern -- Chief 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 Donnelly -- Wells Fargo -- Analyst

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

Thomas E. O'Hern -- Chief 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. Juste -- Mizuho -- 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 Kingsmore -- Executive 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. Juste -- Mizuho -- 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'Hern -- Chief 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. Juste -- Mizuho -- 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'Hern -- Chief 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. Juste -- Mizuho -- Analyst

Thanks, Tom.

Operator

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

DJ Busch -- Green 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 Kingsmore -- Executive 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 Busch -- Green 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 Kingsmore -- Executive 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 Busch -- Green 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'Hern -- Chief 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 Busch -- Green Street Advisors -- Analyst

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

Thomas E. O'Hern -- Chief 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 Okusanya -- Jefferies -- 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 Kingsmore -- Executive 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 Okusanya -- Jefferies -- Analyst

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

Scott Kingsmore -- Executive 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 Okusanya -- Jefferies -- 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 Kingsmore -- Executive Vice President, Chief Financial Officer and Treasurer

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

Tayo Okusanya -- Jefferies -- Analyst

(inaudible)

Thomas E. O'Hern -- Chief 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 Okusanya -- Jefferies -- Analyst

Got it. All right. Thank you.

Scott Kingsmore -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you.

Thomas E. O'Hern -- Chief 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 Wood -- Vice President of Investor Relations

Scott Kingsmore -- Executive Vice President, Chief Financial Officer and Treasurer

Doug Healey -- Executive Vice President, Leasing

Thomas E. O'Hern -- Chief Executive Officer and Director

Jim Sullivan -- BTIG -- Analyst

Samir Khanal -- Evercore -- Analyst

Craig Schmidt -- Bank of America -- Analyst

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Jeremy Metz -- BMO Capital Markets -- Analyst

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Christy McElroy -- Citi -- Analyst

Brian Hawthorne -- RBC Capital Markets -- Analyst

Linda Tsai -- Barclays -- Analyst

Jeff Donnelly -- Wells Fargo -- Analyst

Haendel St. Juste -- Mizuho -- Analyst

DJ Busch -- Green Street Advisors -- Analyst

Tayo Okusanya -- Jefferies -- Analyst

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