Jean Wood - IR Tom O'Hern - SVP and CFO Doug Healey - EVP, Leasing Scott Kingsmore - SVP, Finance.

James Sullivan - BTIG Craig Smith - Bank of America Merrill Lynch Jeremy Metz - BMO Capital Markets Christy McElroy - Citi Todd Thomas - KeyBanc Capital Markets Alexander Goldfarb - Sandler O'Neill Linda Tsai - Barclays Capital Wes Golladay - RBC Capital Markets Samir Khanal - Evercore ISI Michael Mueller - JPMorgan Omotayo Okusanya - Jefferies Caitlin Burrows - Goldman Sachs Richard Hill - Morgan Stanley.

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

Thank you, 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's website at macerich.com.

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

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

As we've mentioned several times at our last calls that bankruptcies and early terminations in 2017 tempered our growth in the first half of 2018, as we work through leasing up that space. Most of that space has been re-leased by September 30, as is evidenced by our 95% occupancy rate.

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

Looking at results of operations for the quarter, FFO was $0.99 per share, which compared favorably to our guidance of $0.97, and exceeded the $0.96 reported in the third quarter of last year. Quarter-end occupancy was 95.1%, up 80 basis points from last quarter, and up 80 basis points from September 30, 2017.

Same-center net operating income including lease termination revenue was up 3.7% for the quarter. Excluding lease termination, revenue same-center was up 3.1%. As we indicated on the last earnings call, we expected to see this acceleration 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, and our 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. 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 and a joint venture with Seritage. Seven of those nine are on the closure list; the other two 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 of the stores, the five stores that are not owned by us, four of which are owned by Seritage, one is owned by Sears. And 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 zero co-occupancy exposure. At the other 10, the amount is immaterial in total about a $0.01 a share if all those locations close.

Of the 16 locations that we have ownership positions in and 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 spend over the course of the next three to four years.

Shifting out to the redevelopment, development pipeline, at Kings Plaza in Brooklyn, during the third quarter we get - had the grand opening of the $100 million redevelopment.

This is a case for to recapture the Sears Box that was doing $130 million in sales, the project significantly improved the overall tenant mix at 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 is also a very significant physical transformation and you can see the before and after photos on the cover of our supplement.

At fashion district of Philadelphia construction continues on a four level retail hubs standing - expanding over 800,000 square feet in the heart of downtown Philadelphia. We have signed leases or have commitments for tenants for over 87% of the leasable area.

Noteworthy commitments include Century 21, Burlington, H&M, Forever 21, Columbia Sportswear, AMC Theaters, City Winery and Alta [ph]. We have a number of other exciting tenants we will be announcing in the near term, the grand opening is planned for September 2019.

At Scottsdale Fashion Square under construction upon an 80,000 square foot exterior expansion, including restaurants and high-end fitness club. The expansion is 100% leased and includes Nobu and Ocean 44 restaurants amongst others. In addition, we have opened a new Apple store and are adding co-working space in what had been the Barney's store.

Apple held their grand opening on September 29 when the construction of the industrious co-working space for the balance of the former Barney's box is in process with an anticipated first quarter of 2019 opening. We expect sales productivity for this box to be significantly higher than what we we're seeing from the Barney's location.

This is another prime example of an adaptive reuse of an underperforming anchor store with vastly better traffic generating uses. In September, we were pleased to announce that we formed a 50/50 joint venture with the Simon Property Group to create Los Angeles Premium Outlets.

This is a tremendous site located on heavily traveled 405 Freeway in Los Angeles. We will be 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 underway with their site work and we will commence our construction once they finish that. The planned opening is fall of 2021. With that, I'll turn it over with Scott to discuss the balance sheet..

Thank you, Tom. The balance sheet continues to be in good shape. At quarter-end the balance sheet metrics were as follows. Debt to market cap was 48%, average debt maturity is 5.3 years and our maturities are very well-laddered by year into the future. Interest coverage is 3.2 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 2.89% 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 three-year swap at 2.85% effectively locked $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 flooding rate debt exposure, we have planned a financing of Fashion Outlets of Chicago which is currently encumbered by a $200 million floating rate loan.

We have arranged to refinance the property with a $300 million, 12-year fixed rate loan with a major life insurance company. The refinance is expected to close in January 2019 and it 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 in SanTan Village each of which are underleveraged 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 net operating income growth.

This full year guidance also equates to a same center net operating income range of 2.2% to 2.7%, excluding lease termination income. We believe that this higher range, excluding lease term income is noteworthy and is indicative of a less disrupted and healthier occupancy environment.

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

Thanks, Scott. In the third quarter, sales remained strong and leasing velocity continued. Portfolio sales ended the third quarter at $707 per square foot, which represented a 7.3% increase on a year-over-year basis.

Economic sales per square foot, which are weighted based on NOI were $819 per square foot and that's up from $770 per square foot a year ago. Occupancy was at 95.1% and this represented an 80 basis point increase on a year-over-year basis and from the second quarter 2018.

Trailing 12-month leasing spreads were 10.8% and as we mentioned on our last earnings call, in the second quarter we had a package of 11 deals with one particular kind of 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 30, 2017. Leasing volumes were strong during the third quarter, a total of 856,000 square feet of leases were signed, bringing the total activity during the first 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 Scottsdale Fashion Square which is nothing short of incredible. It's one of the nicest stories stores, I've ever seen attached to a super-regional shopping center with fabulous inside and outside exposure. It really is a must see.

Understanding the need to differentiate, stay cutting edge and to accommodate the demand of our shoppers, we continue to elevate our food, entertainment and experiential offerings. As Tom mentioned in the third quarter, we signed leases with City Winery a Fashion District of Philadelphia and Nobu Scottsdale Fashion Square.

Other recently signed leases in these categories include the Void Tysons Corner Center, Round 1 Bowling at Valley River, Crayola 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 our advanced discussions on several additional locations throughout our portfolio.

Other retailers in these categories include Two Bit Circus, Pinstripes, Dave And Busters, Pot [indiscernible] shack out of London and rec room out of Canada, all of whom we are actively working with.

Theatres are also expanding and we look forward to furthering our business with some of the industry leaders such as Cinemark, CinéBistro, Bow Tie and others. Lastly in the experimental category the cadence Children's Museum is well under construction and the third level of Santa Monica place and will open in the first quarter of 2019.

This is one of the most exciting deals we've completed in this category this year. The museum will be the only one of its kind in all of Los Angeles and is expected to attract over 400,000 visitors per year.

This will unquestionably have significant positive effect on all tenants at Santa Monica place and in particular our dining options on the third level. We remain active with the digitally native brands executing multiple leases including the first ever bricks and mortar store with Tysons Corner.

We also signed Alex & Ani Fashion Square, Twenty Ninth Street and 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 were 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 total only 16 stores and that compares to 92 closures in 2017.

This is the slowest closure pace we've seen since 2012. Sears filed for bankruptcy as Tom mentioned on October 15, 2018 and this bankruptcy has long been anticipated and we've been actively working on redevelopment plans for all of our Sears locations.

So in conclusion, our leasing metrics remain solid and the level of bankruptcies is significantly lower. We continue to focus not only on our traditional retailers but also those in the entertainment, experiential and digital sectors.

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

Thank you. [Operator Instructions] We will take our next question from Jim Sullivan of BTIG. Please go ahead. Your line is open..

Okay. Thank you. Tom, I think when you were in your prepared comments, you talked about the capital requirement of re-tenanting 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 kind of a re-concepting [ph] of the space into smaller stores that might generate perhaps significantly higher income?.

Well, Jim, it's going to be a combination of things. That number really relates to the top two categories, and as I'd mentioned first, the nine locations we have were Seritage and then also including the several locations that we own. The exact details to be determined, that's just an estimate.

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

We will take our next question….

You give a follow-up to that, Jim?.

Sorry. Yes.

Tom, am I on?.

Yes, Jim. Yes..

Okay.

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

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

Okay. Very good. Thank you..

Thank you..

We will take our next question from Craig Smith of Bank of America. Please go ahead. Your line is open..

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

Is that possible to get a comparable number in 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 the leasing spreads?.

Craig, we typically don't try to predict where sales are going to be. It's obviously been strong in the last four or five quarters, and there's no reason to think that will 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 weighed on that stat.

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

Yes. And I think Tom mentioned 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%..

Okay. Thanks..

Thanks, Craig..

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

Hi, Jeremy..

Hey, guys. So Tom, you mentioned you know the potential additional Sears spend here. You have Philly and Scottsdale on going a bit of capital you'll still contribute it to west side if the new venture was signed in. You guys did 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 to-date over 8 times, how should we think about that trending and what sort of target range do you want to get back -- get back down to you and what's the timing or expectations to do so?.

Right. So, Jeremy, the projects you mentioned you know really stretch out all the way to 2021. And even when you include Sears in the mix, we're probably talking about you know $200 million to $250 million spend per year. We will also have the benefit.

I think when you're referring to the balance sheet you're probably talking about the single metric of debt to EBITDA. And we'll also have the benefit of Kings Plaza EBITDA in our numbers for full year next year. Philly will start to come online next year as well 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'll actually move it down a little bit.

But if you take a look at an average compounded annual growth rate for us on same center sales and you move that forward from today into 2021.

And you look at these projects and you look at the timing of when the EBITDA from the construction projects rolls in, we should actually see you know a slight decline as a result of all these projects and the natural growth we would expect out of our portfolio going forward.

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

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?.

You know we've gone through a period of time since 2012, when we've sold a lot of non-core assets, you know recently we announced that we'd sold a couple of power centers which were carryovers from the Westcor acquisition in 2012, but you know that being said, we don't have any dispositions in our guidance.

I think we're ready to focus on the portfolio we have been driving same-center NOI growth and EBITDA growth. So I wouldn't expect too many dispositions from us in near future. .

Thanks, Tom..

Thank you..

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

Hi, guys.

And just for the record 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 being controlled this space or were these just naturally rejected?.

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

Okay. Got you.

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

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

Okay. And then just in terms of the L.A. outlet project is your contribution of land part of the pro rata cost consideration in the 50/50 JV.

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

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

So the city is going through doing what they have to do on the site work, on site and off site work and 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 the responsibilities, I mean we're just going to -- we're 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. .

Thank you..

Thanks..

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

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 any additional relief or package lease deals like you had in the second quarter or tenants still coming to you with those requests?.

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

Okay. And question, looking at a Caroline comments, that took a pretty big step up in sales.

I know there's been some re-tenanting there but just curious if you could speak to what drove the big increase this quarter?.

So we've recently added a Tesla to the project and so that's causing some increases. Caroline's always operated a very healthy growth clip independent of that but I think - I think Tesla is probably one of the catalysts for that. .

Got it.

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

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

Okay.

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

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

Okay, got it. Thank you..

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

Sure. Good morning out there..

Hey, Alex..

Hey, Tom. How are you? So it sounds like we got a question and a follow-up is what it sounds like.

So the first question is, I realized it's getting towards year end and probably more thoughts around 2019, but just going to the same-store guidance reduction this year, you guys reduced the lease term income that you expected on your second quarter call.

And the lease term income that you're expecting now 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 forecast $15 million for the year this quarter you're forecasting $14 million.

I mean, does $1 million make that much of a difference a 50 basis point difference or is there something else going on in the reduction?.

Yes, Alexander, this is Scott. I'll go ahead and take that one. So, as I mentioned in my opening remarks the - the gross dollar change as a result of the change in same-center is really not that material it's $2.5 million, as it's comprised of nearly a penny of termination income decline.

It's a reassessment of where we stand today relative to our bad debt exposure and we bump that up a million bucks. 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, it's not that consequential, but….

And I think, what's really relevant here is the acceleration of same-center. I mean, people are getting hung up because of what effectively is a 5 basis point shift in the same-center growth excluding term fees.

Term fees or down that's always a guess, we made term fee of $21 million in 2016, $22 million and 2017 I think, that's what we used is our guesstimate for 2018, and we've turned that over the course of the year.

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

Okay. And then the second one is you know 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 Candlestick premium?.

You know I mean, certainly we have -- we are open to doing you know other joint ventures with them with our joint venture partners going back you know years ago when we did the IBM portfolio together. I mean, what we're really focused on today is the Carson project.

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

Okay. Okay. Thank you, Tom..

Thanks, Alex..

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

Hi.

How does the Apple at Scottsdale differ from the one at Broadway Plaza? From the last call, you noted that the Broadway Plaza has the new Apple format to Scottsdale too?.

Linda, it's Doug. The - 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. .

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

Wow. Yes. I'll be there and I'll look forward to it. The occupancy for your group four malls and five malls were up quite a bit you know a 110 bps and 240 bps respectively.

Can you talk a little bit about what drove that and if you expect these increases to continue?.

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

I mean a lot of the emerging brands and digitally - individually made the retailers don't focus on that group of assets but we - you know we have seen additional leasing happening the last couple of quarters of the legacy retailers and that's helped to benefit those assets in particular..

And then the $1 million increase in bad debt expense for guidance was due to the five bankruptcies in 3Q, you referred to earlier and then overall do you expect that bad debt expense to be down year-over-year in 2019?.

Yes, 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 million $0.05 to $0.06 $6 million.

You know 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, you know, sometimes you need to adjust up or down. I think….

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

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

Yes, if you go back to 2014, it was $5 million, 2015 $5.4 million, 2016 $4.5 million, 2017 $5.8 million, you know, this year we've got it in - into $6 million. So it will probably move a little bit, Linda. I mean we're not giving guidance on 2019, yet my guess is it would move down, but not significantly..

Thanks. .

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

Hi, everyone. I just wondered that you know go back to that 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 candidates are doing. It will cost the ones that have a 20% plus occupancy cost.

How does that list compare versus maybe a year ago?.

Yes, hi, it's Doug. The mood is definitely changing. And by way of example you know 18 months to 24 months ago, we meet with retailers all the time.

And the conversations revolved around traffic being down in the malls then online shopping killing the mall business, but fast forward 18 months, 24 months and we're still having these same conversations, but these conversations are much different.

They're more about the tenants are talking about the product 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 their 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 are talking about probably in the bottom 20% tile. But I think that discrepancy is becoming higher and higher to the better..

Okay. Thanks a lot..

We will now take our next question from Samir Khanal from Evercore. Please go ahead. Your line is open..

I know you haven't provided guidance for 2019, but can you just help us walk - help us through how to think about sort of capitalize interest for 2019 about sort of capitalized interest for 2019 and maybe the impact to sort of interest expense as we kind of from later reviews for next year?.

Yes, Samir. Hi, Scott here. I think you would find that as we look at 2017 to 2018 capitalized interest was relatively consistent as our weighted average interest rate ticks up which we do expect that to continue in the 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 costs or basis associated with those stores.

So, that's probably the wildcard, it's hard to estimate at this point in time given the uncertainty as to when those stores will be coming back. But it's more than likely that we'll see a tick up in that line item associated with Sears..

Okay. And I guess as a follow-up, I mean even on the termination fee which is also sort of a wildcard, 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?.

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

Got it. Okay. Thanks, guys..

Thank you..

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

Yes, 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 that's doing $800 a foot?.

I might get, it variety of things look, there, 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 you know well over 400,000 square feet. So it's safe to assume the total cost is going to be well over $400 million.

So it's sharing that capital is -- this 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 -- we've made the decision and you'll also recall Mike, when did Chicago we did have a partner at that time, we ultimately bought them out but we did have a partner 50/50 partner at the time..

Okay. That was it. Thanks..

Thank you..

We will take our next question from Omotayo Okusanya of Jefferies. Please go ahead. Your line is open..

Yes, good afternoon.

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

Omotayo, we've said for years that you know we're not going to do a lot of these it's going to be really urban locations and unique locations.

We're not going to really try to go out there and make it 20% of our business or probably even 10% of our 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 a day usually very, very slowly because it's know bumper to bumper in Los Angeles 24/7. And it's a great location. So L.A. is underserved as relates to the outlet business. And you know we think it's a great location, we think it's a great partner and it's going to be a tremendous project..

Thanks. That's helpful.

And then in regards to merchandising mix, could you talk a little bit about that, I mean our understanding is that there might be radius restriction at the Citadel fashion outlet?.

I'm not sure radius restrictions are going to be a real big issue for us. That's quite a distance from the Citadel and the next closest outset centers are about 50 miles away and that could be two hours in LA traffic, one cop is on to the south and then Camerino to the north. So we don't really think that's going to be a major problem for us..

Excellent. Thank you..

Thank you, Tayo..

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

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 just wondering are the occupancy costs retailers are willing to pay lower than before or do you think it has to do with the mix of the types of tenants you're working with or do you think kind of market rents and occupancy expense -- sorry, occupancy costs will go back up some?.

Well. I think it's a function of tenant sales growth has outpaced the rent bumps. So we're back in that situation which is actually very favorable. We think we're going to continue to be able on 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. .

Okay. Got it.

And then maybe just 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'll expect that to take to reach the stabilized yield?.

Go ahead….

Yes, Caitlin. Hi. This is Scott. So again this is a multi-phased project, right. So as we've repurposed The Barneys Box, Apple is open we just mentioned that.

Industrious will be opening their coworking facility of approximately 35,000 square feet in January I believe, Doug, correct?.

Yes..

We will expect the peripheral tenants be on the 80,000 square foot expansion on the outside to start to open in fall of 2018 but frankly that will continue all the way through the end of 2019. There may be an opening that's built into 2020 so it's going to be relatively well distributed throughout 2019..

You just mentioned the fall of 2018 like now or even the fall of 2019?.

I'm sorry, fall of 2019..

Okay..

I mean, year off..

Okay. Okay. They'll start opening in a fall like a year from now but they're taking longer than that. .

Yes. So let me clarify, Caitlin. We've got a pad significant restaurant use that I think will resonate great in the market that will open in fall of 2018. The balance of the exterior tenancies though are really be sprinkled throughout 2019 probably clustered towards fall of 2019. .

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

Okay. Thanks..

Thanks, Caitlin..

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

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 the 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?.

It's Doug. Yes. I think that's the goal. The micro stores are obviously smaller. We were talking about un-tuck it the common area. They won't have quite the amount of merchandise, but they'll have just the not 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..

Got it so.

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

That's fair..

Okay. Great guys. And then, just one more question, it looked like overage rents or maybe up a little bit more than we were expecting a recognized 3Q 2018 is seasonal.

But is - is the higher than at least we were expecting over and overage rents reflective of the improving sales environment that you've spoke of and do you - do you sort of expect overage rents to continue to trend higher on a quarter-over-quarter basis?.

Yes, Rich. Hi. This is Scott. I think we'd 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 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 average 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. It's frankly not a significant one.

I think, I'd underwrite it is relatively flat and consistent..

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

Thanks. Thanks, Rich..

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

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 and 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 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 in a redeveloped at a much higher cost, but theoretically 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?.

Jim, we're very specific on the plans. What we're not is 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 with Seritage or others, but we're very specific, but it would be inappropriate to be putting forth return hurdles at this point until we actually have control of those boxes..

Okay. And then 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?.

No, I wouldn't assume that. That's a pro-rata share that touches every single series 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..

Okay.

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

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

I understand..

-- specific dues superstition springs I think Desert Sky..

Okay. Very good. Thank you..

Thanks, Jim..

It appears there are no further questions..

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

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