Q4 2022 Macerich Co Earnings Call
Greetings welcome to them makes you each company fourth quarter 2022 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation question.
Questionnaires, we actually please limit your time to one question and one follow up question if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad I'll now turn the conference over to your host Samantha greeting you may begin.
Thank you for joining us on our fourth quarter 2022 earnings call. During the course of this call 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, including statements regarding projections plans or future expectations.
Actual results may differ materially due to a variety of risks and uncertainties set forth in today's press release, and our SEC filings, including the adverse impact of the novel Coronavirus on the U S regional and global economies and the financial condition and results of operations of the company and its tenants.
Conciliations and 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 on the investors section of the company's website at laser Shanghai.
Joining us today are Tom O'hern, Chief Executive Officer, Scott King's Moore, Senior Executive Vice President and Chief Financial Officer, and Doug Healey Senior Executive Vice President of leasing and with that I'd like to turn the call over to Tom.
Thank you Samantha.
We are pleased to report another strong quarter with the majority of our operating metrics continuing to trend very positively.
After a solid first three quarters of 'twenty, two we had a very strong fourth quarter.
We saw robust retailer demand.
And although tenant sales were flat in the fourth quarter versus a very strong fourth quarter of 'twenty. One we were up 3% for the year.
Yes.
Our average sales per square foot for tenants under 10000 square feet was $869, a 7% increase over 2021.
Yeah.
We continue to see traffic at about 95% of pre COVID-19 levels, but tenant sales are exceeding pre pandemic levels with year to date sales up 13% <unk>.
Compared to the same period in 2019.
The quarter continued to reflect retailer demand that is at a level that we have not seen since before the great financial crisis.
Some of the other fourth quarter highlights include occupancy.
We ended the year at 92.6 that was 110 basis point improvement from the fourth quarter of 'twenty one.
And a 50 basis point sequential quarter improvement over the third quarter of 'twenty two.
We continue to see strong leasing volumes, which for the year were in excess of 21 levels for.
For the quarter, we executed 261 leases for 900000 square feet.
Doug will be providing more detail on that in a few moments.
We saw same center NOI growth of 2% in the fourth quarter compared to the fourth quarter of 'twenty, one which was a very strong quarter in a tough call.
<unk> per share for the quarter came in at 53.
For the year S. I saw was $1 96, which was about 3% three <unk> ahead of consensus.
On January 27th we declared a dividend of <unk> 17 per share.
Payable March 3rd to record holders as of February 17 to 23.
Since our last earnings call.
We've had a significant amount of financing activity.
Which Scott will elaborate on shortly.
The debt markets for a quality town centers is improving and we're getting our deals done.
Yeah.
We continue to focus on redevelopment and repositioning of our top quality centers.
Much of this work is mixed use diversification and densification.
Some examples of that include a chilling Commons, we're moving forward with 110 unit luxury apartment project, which leverages a developable surface parking lot at this highly attractive open Air Center.
At Flatiron crossing in Broomfield, Colorado in partnership with a national residential developer we are planning a 330 unit luxury multifamily project.
Centers around centered around 2.5 acres of public amenities.
At Biltmore fashion, we're advancing plans for 10 storey 250000 square foot class, a office tower, including best in class retail and food and beverage.
Plans are also evolving for a 250 unit luxury apartment complex that Billboard.
At Scottsdale fashion square, we're moving forward with plans for multifamily residential and up to 500000 square feet of class a office.
This is in addition to the re merchandising of the Nordstrom wing with luxury brands and dining which is well underway.
At our flagship Tysons corner Center.
We're building upon our highly successful phase one mixed use development that brought <unk>.
<unk> tower Vida and the Hyatt Regency to the center.
Where are you using a portion of our two 4 million square feet of available entitlements.
To plan for another mixed use project.
Also recently, we announced the addition of <unk> Museum at Santa Monica place.
<unk> is an immersive digital art destination, which is expected to occupy 48000 square feet of space on the third level of the property in.
In the former Arclight theater space.
<unk> expects to attract 1 million visitors per year.
It's a great entertainment edition and a major traffic generator that will bring tremendous energy to the third level of Santa Monica place.
As Doug will elaborate on shortly we continue to be pleased with the strength of the leasing environment.
As expected given the depth and breadth of the leasing demand we've had a very robust leasing results in 2022.
The leasing interest continues to come from a wide wide range of categories that includes health and fitness such as lifetime at Broadway and Scottsdale fashion square.
Food and beverage usage, including pinstripes in round one.
Entertainment, such as Art Museum.
And sports such as Shields, and Dick's Sporting goods co working hotels, such as Caesars Republic at Scottsdale, and multifamily family projects that Carolyn Flatiron Tysons.
Interest continues at levels, we've never seen before.
Bankruptcies continue to be at a record low.
And we continue to expect gains in occupancy and net operating income as we progressed through 'twenty three.
And now I'll turn it over to Scott to discuss in more detail the financial results for the quarter significant financing activity in guidance for 'twenty three.
Thank you Tom.
Now onto the highlights for the quarterly financial results. This morning, we posted solid operating results for the fourth quarter same center NOI increased 2% versus the fourth quarter of 2021, excluding lease termination income for the year same center NOI increased seven 5% versus 2021.
Excluding lease termination income this was consistent with our prior estimates and our prior guidance. This is the second straight year of NOI growth that has exceeded 7% with 'twenty or 'twenty, one same center NOI growing seven 3% over 2020.
<unk> per share for the quarter was 53 cents and was $1 96 per share for 2022.
The quarterly result was equivalent to <unk> per share during the fourth quarter of 2021, which was also 53 per share.
Similar to our same center NOI growth result.
S. A solid result was consistent with our prior estimates and prior guidance.
That has helped per share exceeded street consensus as Tom mentioned by roughly three cents a share.
Primary and offsetting factors contributing to this quarterly <unk> per share increase or this quarterly <unk> per share results are as follows one.
We had a $7 million increase in straight line rents due to straight line rent from the Google lease at one Westside.
As well as from straight line receivable write offs during the fourth quarter of 2021, as we then finalized our Romanian pandemic tenant related receivables last year.
Secondly.
A $4 million increase from saying same center NOI.
And third a $4 million relative improvement in valuation adjustments pertaining to our retailer investments net of taxes offsetting these three positive factors were the following.
One a $7 million increase in interest expense due to rising rates to a $5 million quarterly decrease in S. F. L generated from land sales.
And three a $3 million decline in lease termination income.
On to guidance. This morning, we issued our initial guidance for 2023 S O which.
Which is estimated in the range of $1 75 to $1 85 per share.
Here are some details underlying the guidance.
And that's all range includes an estimated same center NOI growth range of 2% to 3%.
This range includes an estimated decline in lease termination income from $25 million in 2022 to a more normalized $10 million in 2023 and.
In terms of the quarterly cadence for 2023 S. I felt guidance, we expect 23% in each of the first and second quarters, 25% in the third quarter.
And the remainder in the fourth quarter of 29%.
Primary factors to reconcile between our 2022 actual life. That's all that we've just reported and the 20th twenty-three estimated S. S. All were as follows.
Same center NOI growth is estimated to contribute eight cents of S. F L.
Okay.
Secondly, five cents of F. I was estimated to come from a relative improvement in valuation adjustments pertaining to a retailer investments net of taxes.
These factors were offset by a 21 cent increase in estimated interest expense due to rising rates.
Les a seven cent decline in lease termination income.
And then lastly, approximately a two cent decline in noncash straight line rental income.
To emphasize our 'twenty to 'twenty three outlook continues to reflect healthy operating cash flow of roughly $315 million before payment of dividends.
More details of the guidance assumptions are included within the company's form 8-K supplemental financial information.
Information specifically on page 15.
It was filed earlier this morning.
Now onto the balance sheet.
We continue to make good progress in our financing pipeline in early December we closed a three year extension of our $300 million C and B S alone on Santa Monica place the loan extended the extended loan carries a very attractive floating rate of LIBOR, plus 148%, which is converted to sell for probably in the next.
Two to three months the law and now matures on December nine 2025, including extension options.
On January 3rd as we turned the page on the calendar year, we closed a $370 million five year refinance of the previous $363 million of combined loans that formerly encumbered the green acres campus, both on the mall and the power Center.
Both of which were scheduled to mature in the first quarter of 2023. This new C. M. D. S loan bears a fixed interest rate of 5.8%. It's interest only during the entire term and matures on January six 2028.
The Companys joint venture that owns Scottsdale fashion square is in the process of refinancing the existing $405 million mortgage loaded.
The new five year loan.
<unk> is expected to be at fixed rate.
Well on the loan balance will be $700 million and that is expected to generate.
Roughly $150 million of incremental liquidity to the company.
This seemed yes loans is expected to close but then the coming several weeks.
At year end, we had $512 million of available liquidity.
Debt service coverage was a healthy two seven times.
Net debt to four at EBIT tax splitting leasing cost at the end of the quarter was eight eight times.
Now I'll turn it over to Doug to discuss the leasing and operating environment.
Thanks Scott.
We closed out 2022, with very strong leasing metrics and leasing volumes. In fact 2022 was a record leasing year dating back to before the global financial crisis when viewed on a same center basis.
Fourth quarter sales were basically flat versus fourth quarter 2021, but for the full year 2022 sales were up almost 3% when compared to the same period in 2021.
And given the very strong sales volumes, we saw in 2021, it was a very difficult year to comp positively against.
Sales per square foot as of December 31, 2022 were $869.
Just a little from a record of 877 at the end of the third quarter.
Trailing 12 leasing a trailing 12 month leasing spreads remained positive at 4% as of December 31, 2022, that's down from six 6% last quarter.
Essentially flat when compared to December 31, 2021.
In the fourth quarter, we opened 226000 square feet of new stores.
For the full year of 2022, we opened almost 900000 square feet of new stores, which is just about on par.
With where we were during the same period in 2021.
Notable openings in the fourth quarter include anthropology at Biltmore fashion Park.
Richie timberland at fashion outlets of Chicago.
Free people at the Oaks Freeberg.
Carolyn comment.
Lou I'm in Santana village North face at Washington Square.
And three stores with JD sports at Country Club Plaza, Scottsdale fashion square and Victor Valley.
And the luxury quarter luxury category, we opened Brunello, gianelli, Dolce and Gabbana and Gucci men all at Scottsdale fashion square.
We also opened shake shack at Kings Plaza.
Capital, One cafe of country Club Plaza.
And the digitally native and emerging brands category, We opened Allo Yoga Kids and Commons brilliant Earth at Santa Monica place ever Lane and opened four at Tysons corner.
Let X at Broadway Plaza, Chandler fashion, and vre, Akela, and common and village at Corte Madera.
Yeah.
Now, let's look at the new and renewal leases, we signed in the first quarter or fourth quarter.
In the fourth quarter, we signed 261 leases for just over 900000 square feet.
For the full year 2022, we signed 974 leases for $3 8 million square feet.
As I mentioned earlier 2022 was a record leasing year dating back to before the global financial crisis when viewed on a same center basis.
Our focus in the fourth quarter was in large part addressing our lease explorations finalizing 2022 and getting a head start in 2023.
And doing so in the fourth quarter, we signed over 200 renewal leases with almost 100 different brands totaling 640000 square feet.
With that we now have commitments on 52% of our 2023 expiry square footage with.
With another 27% in the letter of intent stage.
These figures are virtually unprecedented at this early stage in the year.
And given the noise and uncertainty that exists in the macroeconomic environment I'm pleased with these statistics as we are basically taking a great deal of risk off the table in 2023.
2022 was also a year of newness for us, bringing new unique and emerging brands was a major initiative for our leasing team and a way for us to really re imagined and differentiate our town centers from our competition.
To that end in 2022, we signed over 100 leases with 88, new to me switch brands totaling 440000 square feet.
Examples include our <unk> Z and as Tom mentioned, there Mezz laughter yoga ever Lane open Port Parachute Reformation, Roark Rockies and Samsung that's just to name a few.
Turning to our leasing pipeline.
At the end of the fourth quarter, we had 140 leases signed.
For just over 2 million square feet of new stores, which we expect to open in 2023 2024 and early 2025.
In addition to these signed leases were currently negotiating nearly 100, new leases for stores totaling about a half a million square feet, which will also open in 'twenty three 'twenty four and early 2025.
So in total that's over two and a half million square feet of new store openings throughout the remainder of this year and beyond.
And I want to emphasize these are new leases with retailers not yet open and not yet paying rent.
And these numbers do not include renewals.
And I can tell you that this leasing pipeline of new store openings now accounts for $62 million of incremental rent.
And this represents approximately 8% of our current net operating income.
And this incremental rent will continue to grow as we approve new deals and signed new leases.
So to conclude.
Our leasing and operating metrics were very solid in 2022.
Sales in 2020 to outpace 2021 by nearly 3% in 2021 was a very strong year to comp against.
Occupancy is up 110 basis points since the end of 2020, one and up 410 basis points and all these seven quarters since our trough at the end of first quarter of 2021, and we expect this trend to continue throughout 2023.
Leasing spreads remain positive.
We will also continue to improve as we increase occupancy.
There were no bankruptcies in our portfolio in the fourth quarter and only three for all of 2022.
And bankruptcies overall are at their lowest level since 2015, which is consistent with our significantly reduced tenant watch list.
Leasing volumes were at record levels when viewed on a same center basis.
All of which is a very strong vibrant and exciting pipeline of tenant slated to open this year and into 'twenty four and even 2025.
I mentioned this last quarter, but I think it's worth repeating.
Although the future remains unknown and despite the macroeconomic backdrop and looming potential recession.
To date, we continue to see very little pull back from the retailers.
And I think this is a result of the very healthy retailer environment that exists today.
As well as Testament to our best in class portfolio of Superregional town centers.
And now I'll turn it over to the operator to open up the call for Q&A.
Thank you and at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
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Okay.
Our first question comes from the line of Gerrick Johnson with Deutsche Bank. Please proceed with your question.
Hi, everybody. Thank you and thanks for the puts and takes in guidance. Scott I was wondering you know what bad debt assumptions did you forecast and guidance you know given the macro backdrop.
And any background assumptions on retention ratios or insights or further insights into the 10 million in lease termination.
And come out would be helpful.
Okay.
Thanks, Derek good afternoon, bad debts, we expect to be very normal hum not significant at all and that's consistent with what we're seeing again, Doug mentioned are.
Excuse me our tenant watch list is very low incidence of bankruptcies are low. So we don't expect a significant amount of bad debts, and that's kind of consistent also with the level of lease termination income dropping so significantly from $25 million last year down to an estimated 10 million. This year. There's just there's a lot less volatility those.
<unk>, obviously escalate during times of volatility so we expect.
That environment to be much more normal.
And then the retention ratio the last part of that question yeah. Thanks, Derek for the memory Jog. We have you know for the last several months last several quarters, frankly experienced very strong retention rates.
You know at times, where were re merchandising space, we're certainly choosing to take that offline and upgrade the merchandising mix, which resulted in some downtime, but but generally we're seeing very strong retention rates as we've talked to our.
Retailers about renewing their fleet.
Okay. Thanks, and then let's shift to leasing right.
I mean, so you know clearly the way it looks right now. According to you is the deal pipeline is shaping up pretty strongly but are you seeing any shifts given the macro uncertainty I mean, clearly 'twenty, one and 'twenty two we're solid.
Leasing years, but I guess the question is our retailers still pushing through with expansion projects in your view, how our leasing and rent negotiation progressing or changing early in 'twenty, three and I guess lastly, like you've been through downturns before are you seeing any leading slowdown indicators.
This point any.
Any further leasing info I'm certainly is valuable.
Derek I'll start and then I'll.
Pass it off to Doug.
We're seeing actually quite a bit of interest.
I would say, even heightened sense of urgency to get deals documented and done.
You saw we just announced.
A big one at Santa Monica place and there's two or three that are going to follow that are.
Not subject to.
Mentioning that the retailers name, yet, but you'll be seeing announcements within the next few weeks. So anything if anything we're seeing a heightened sense of urgency to get deals done and documented and not a lot of pressure on rate at least on the bigger higher profile deals Doug you might care to speak more of the.
Inline spaces, Yeah, Hey, Hey, Derik.
It's early it's early days in 2023, but I can tell you and I mentioned this in my remarks that to date, we've really seen no retailer pullback retailers are honest honoring the leases they sign their opening the leases they sign and there can they continue to negotiate the leases that are out.
And I think you know if you think about it we have a very very healthy retailer community out there environment and so many of the retailers that were suffering pre pandemic failed during the pandemic. So we're left with a lot of big public companies that are long term in nature and are really being opportunistic when it comes to.
Buck best in class real estate, which we have.
Thanks, guys that's it for me.
Yeah.
Our next question comes from the line of Greg Mckinney.
Mcguinness with Scotiabank. Please proceed with your question.
Okay.
Yeah.
And Greg from Scotia Bank.
Two questions.
Apologize I was on mute rookie mistake.
I apologize if I missed this to any opening remarks, but what was the what's the land sales expectation built into FY2023.
Yeah, Hey, Greg 2022 we had about nine sensitive SSO from land sales net of taxes.
Still have a pipeline that we're executing on numerous transactions that are under contract.
We're looking at 2023, I did say that will land somewhere between 40% to 50% or so of 'twenty two levels.
Yeah.
Okay, great. Thanks, and then back to that leasing on that.
Pretty sizable pipeline expected to to.
Open up over the next few years here I believe you said.
Millions of square feet.
Not mistaken what's the net increase in NOI.
That is expected.
It could be the benefit from that and is that occupancy already reflected in that 92, 9%.
Yeah.
Greg that the occupancy does reflect that pipeline. So it's included in the 92.6.
The pipeline of square Footages 2 million square feet Hello, Doug is rapidly trying to add to that.
And it's a top priority for us to to get that space signed.
We've got to get it open because.
Was really the high fives come when the tenant start paying paying rent.
And.
I think Scott or Doug May have mentioned that $62 million of incremental revenue topline.
That may not all hit NOI.
Because obviously, we're in you know.
Inflationary times and we're fighting some rising.
Operating costs, but the vast majority of it will so I'd estimate you know we can see north of 55 million of NOI pickup as a result of getting those pipeline deals open and paying rent.
Okay. So that was a net number thank you.
Our next question comes from the line of Craig Smith with Bank of America. Please proceed with your question.
Thank you.
One I was just wondering are you still getting signs from the consumer that they want more restaurants at your property and how has the.
Success rate.
Once that you have opened in the lab.
Last couple of years.
Hey, Craig, it's Doug, yes, restaurants, food and beverage fast cash.
<unk> be a huge priority for us in fact food.
Food and beverage and restaurants were the highest comping in terms of sales and in our portfolio. In 2022. So there is a lot of demand and we are seeing if you read what's out there we are seeing a shift in sales from traditional apparel and retail services, including travel and <unk>.
<unk> restaurants, so to answer your question, yes, we're seeing it in the demand is there.
Great and then maybe you can tell me a little bit about RK Museum at Santa Monica place.
The visitors seemed very impressive, but what exactly would you be seen at the museum.
Well it changes constantly Craig they control the content. It's immersive video. So you walk in and you feel like you're part of it you know a wave crashing over you for example, and you can go to their their website. They're open in Korea, I think they've got one other U S location, maybe in Las Vegas.
But they certainly generate a lot of interest a lot of traffic a lot of visits and we think it's gonna be beneficial very beneficial for the third level of Santa Monica place and.
We're hoping the concept and can travel a little bit through the rest of our portfolio, but it's exciting there's nothing really like it around and it's gonna be a tremendous addition.
Great. Thank you.
Our next question comes from the line of Samir.
<unk> with Evercore ISI.
Please proceed with your question.
Hey, Scott or Tom how are you thinking about variable rent or percentage rent this year with the conversion to the fixed rent and I guess on that point is there any sort of potential upside from.
So the international tourism.
Coming back whether it's from China or are there other areas.
Yes, I'm here, a good afternoon or should I say morning, you're out here now on the West coast and we.
We expect our percentage rents to continue to decline as we renew leases and convert those variable rents to a gross rent or excuse me to fixed rents.
That's a concerted effort on our part we saw some of that in 2022, and I think you'll see that accelerate in 'twenty three.
You know, we've just by frame of reference we budget our sales to be neutral in 2023. So you know, we'll see how the rest of the year pans out in that regard but.
We'll certainly see.
Variable rents continue to convert over to to fixed spreads.
And then Samir I'm, sorry second part go ahead sorry.
And the second part of your question was.
No with international Tourism coming back you know I mean from China or other areas is there a potential upside to that number you think I mean, how are you baking in any.
Sort of upside to two percentage rents coming from international tourism coming back here potentially no where we're not getting that specific but if you think about it you think about the Ravenna spending that occurred domestically here in 2020. One as are the Asian consumer gets back out into the world, We'll certainly see some.
Benefit probably see some benefit in markets like Santa Monica, and Chicago, and Tysons corner. So we're not building that into the guidance, but theres certainly room to think that.
Those consumers start to venture into the United States that we'll see some of that international tourism, that's been missing for the last few years start to return.
And any color you can provide on sort of what your assumptions are for occupancy for 23, how much of it occupancy pick up.
Will we see.
Well, we're going to continue to push that obviously the higher the occupancy gets the tougher it is to get there, but we were.
About 94% pre COVID-19 dropped as low as 88, and we've you know we've reached our way back to 92, 6%.
And you know it will be our expectation is to be somewhere between 93, and a half and 94% by the end of next year.
Got it thank you guys. Thank.
Thank you.
Yeah.
Our next question comes from the line of Florida Van <unk> with Compass point. Please proceed with your question.
Okay.
Hey, guys I, Florida had it right.
Question, where you think.
At what point do you expect you're going to recover 19 levels of of NOI in your portfolio and obviously your portfolio has changed a little bit over the last couple of years you made a couple more more asset.
Asset sales et cetera, but it'd be good for maybe for the market to get a sense of what the reference point is then and and how quickly you can get there and obviously clearly your guidance.
The slowdown in your NOI growth.
From the seven 7% plus levels that you've achieved over the last two years. So maybe you get some comment on that as well when you get a chance.
Well the same center growth I mean, that's coming against some very tough comps you know 7% growth to you know for two years in a row. That's that's extraordinary so that's a little bit.
To the norm and this year, we're getting back to a more normal level, but.
In terms of when we get back to pre.
Pre COVID-19 NOI levels, you know we've said for some time, we believe it's going to be you know around the fourth quarter of 'twenty three.
And going forward from there and it'll track.
To some extent with the occupancy level as we get closer to that 94% which were pushing.
Pushing for this year. So we think we'll be there in the fourth quarter and that's not inconsistent with what we've said the past few quarters things are moving along nicely and if Doug keeps doing a great job with his team on the leasing front, we'll get there.
Later this year.
Thanks.
If you can one comment and maybe I'm not sure if I can get your comments on your recovery ratios one of the things that are obviously, you're you're a part of what's going to be a drag on your earnings a little bit and your NOI growth. This year is the fact that expenses are going up perhaps.
In excess of your fixed Cam bumps.
Which will you know, which could drag your NOI growth, which benefits from your 3% bumps in your occupancy gains and hopefully some positive lease spreads as well but.
If maybe if you can give a little bit more comments on what's happening our new leases are you asking and receiving higher fixed cam what other initiatives you have underway that improve your recovery ratios that presumably moving from a turnover based rents.
Temp tenancies to permanent tendencies, it should hopefully improve your recovery ratios in your in your margins as well going forward.
Yes, Floris, we are and as you know we've been a fixed cam shop for many years in fact, most of our leases are on a fixed cam basis with annual escalators that are in the ranging between 4% to 5%.
So you know if I were to say 'twenty, two and 'twenty three inflation.
Has resulted in an abnormal increase in our shopping center expenses, perhaps that slightly outpaced the annual bumps that were getting in fixed cam, but bear in mind year after year, leading up to this hyper inflationary environment that we're currently experiencing we've been clipping along with annual increases that well surpassed.
Inflation. So I think we've had you know plenty of call. It quote Unquote Bank you know to absorb the increases that we're dealing with right now and operating expenses for things like labor and.
Real estate taxes and insurance, we're certainly going to see we are getting those fixed bumps.
With very rare exception and we're certainly going to see our recovery rates continue to improve as we convert temporary space, which today is about seven 5% of our occupancy over the permanent we will certainly see a continued growth in our recovery rates from that.
Okay.
Great. Thanks.
Yeah.
Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.
Hey.
Good morning out there so two.
Two questions first off Tom on the sales obviously, we know Scott can be you know you always get a mix in sales, but curious in the fourth quarter sales were down relative to third quarter is this is this.
You know mix is it inflation like our tenant I understand obviously tenants are strong they're you know they're leasing we were firmly understand that but if the sales level or are customers pulling back or was it a mix of what merchandise. They were buying are just I would've thought in the fourth quarter, you know people splurge and go.
Out with a bang for the holidays, and then maybe pull back once they get the credit card in the first quarter.
Yeah, Alex the comparison was versus the fourth quarter of 'twenty one.
And sales in the fourth quarter of 'twenty, two were flat with the first quarter of 'twenty, one, but 'twenty one was a very strong quarter fourth quarter of 'twenty one.
And so that's not necessarily bad news for an indication that consumers pulling back I think it's just we were going against the tough comp.
You know a lot of the retailers blame blame weather issues I'm not going to go there but.
You know, we we werent, we werent uncomfortable with that result were up 3% for the year and you know in terms of traffic and activity. The consumer is still there and proving to be very resilient. So we weren't necessarily concerned about what happened with sales and traffic in the fourth quarter. It was just going against a very tough fourth quarter of 'twenty one.
Yeah, I was I was comparing it to third quarter.
Trailing 12 to third quarter versus trailing 12 to fourth quarter, but I'm guessing your response would be the same.
Second question is.
On the going back to the occupancy build you guys clearly got a lot of lease term in 'twenty. One 'twenty two recaptured a lot of space. Your overall occupancy is still a few points behind your public peer although they have a different portfolio composition with outlets and malls versus you guys.
But it would seem like you guys would still have a lot of bumps in the tank. If you will on occupancy rebuild that would get maybe better NOI growth. So are there other things there is that maybe it's just the length of time it takes to physically open the space get the tenant and that's really the hindrance. So the occupancy build will.
Come in time, but maybe it's just physically getting it there I'm just sort of curious because it seems like you guys, but youre right about that I mean, you know we announced the deals the day, we sign them. They go into occupancy, but in some cases, if you look at something like a pinstripes or a lifetime fitness, it's going to take close to a year to get it.
And it doesn't start hitting NOI until the buildout. So a lot of the stuff that we're talking about today like our 10 Museum, we're going to get the benefit of that 'twenty four 'twenty five as it relates to NOI growth, but not in 'twenty three so that big pipeline does bode well for the NOI growth as we look forward into 'twenty four 'twenty five.
Thank you.
Thanks.
Our next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.
Hi, Thanks for taking my question I'm, sorry, if I missed it but did you.
Outlined bad debt expectations for 'twenty three.
Yeah. We are we spoke about that just briefly Linda we do not expect those to be significant at all as.
As a result, we just did not disclose the guidance it wasn't trying to be opaque or anything, but we just do not expect that to be significant so very very small line item when you're looking at a company that generates you know nearly $800 million of NOI.
Thanks, and then what's demand like right now from digitally native retailers, that's something that you've talked a lot about in the past is that still kind of going on at the same level of velocity as you've seen in prior quarters.
Linda It's Doug I would say that the digitally native the ones. The retailers that are currently online that are starting to open bricks and mortar stores that slowed compared to the last two or three or four years.
But then you think about.
The brands that were born online that turned into bricks and mortar retailers think about Worby Parker and think about vre and all birds. They were all born online, but now they're just basically traditional retailers they have as much business in their bricks and mortar than they do online so the new one.
<unk> are slowing but the ones that are emerging are really picking up.
Thanks for that just one last one are the luxury retailers turning their store opening plans back to Asia, given the reopening or you know what are you seeing as it relates to domestic demand from their luxury retailers.
Well, where the where that's most relevant for US Linda is at Scottsdale fashion Square, we have we had such great success with the luxury wing and the food and beverage that we added.
A couple of years ago that we're converting the Nordstrom wing to luxury brands and the demand has been very very strong so I'm not a big sample size to speak to your question, but where we are looking to to.
Put in luxury brands, we're having pretty strong demand I don't see it pulling back at all do you don't no not at all it's only gonna, it's only going to get better.
Thanks.
Our next question comes from the line of Todd Thomas with Keybanc Capital markets. Please proceed with your question.
Hi, Thanks, Good morning out there just a question about the same store NOI growth forecast of of 2% to 3% as occupancy is expected to increase which you indicated and it appears rank growth as you know are holding steady here.
Obviously, a lot of other factors, including the expenses and recovery income that you you. Just you discussed but can you just provide a little bit more detail around that build up to the 2% to 3% and sort of I guess my question is you know what what's kind of holding it back a little bit you talked about the.
$62 million of incremental rent or I suppose $55 million of NOI that that you know is expected to come online.
That's pretty significant growth off to your current base. So I'm just curious if you could talk about that a little bit and a little bit more detail around the 2% to 3%.
Sure Todd This is Scott.
The biggest factor and I think we touched on it earlier is downtime.
You know as you take large space off the market.
Most of which was committed some of which is not you've got downtime, which impacts you and as we took a step back as we're doing all of our detailed work looking at our business plan for 2023, we realized that coincidentally or not some of our better space in some of our higher rent or rent generating space in our New York assets.
We're in fact spaces, where we're taking off line. So you know that downtime certainly cuts against growth you touched on the other component obviously, it's temporarily cuts against growth.
If it ultimately so we talked about the 55 million of income incremental pipeline.
It doesn't all hit in 'twenty three.
A significant percentage of that hits in 'twenty, four and maybe some of it even in 'twenty five so if Scott is saying as we take space offline. It's a temporary hit to NOI to be picked up as we put the new tenants backend and Todd just refer to the disclosures we have on our pipeline does will actually get a little bit better than the one we had oh.
Our investor day, because of the improved leasing demand that we continue to see but you can take a look and see what the incremental pipeline is by year.
Okay.
Helpful and how much of the $62 million or or that leasing pipeline how much of that is in the same store.
The vast majority of it is same store AR, we don't have a lot of development ongoing development projects that are significant where we pull anything out.
North of 95%.
Okay, and just last question on the occupancy specifically.
You're looking to sort of be in that 93.5% to 94% range by the end of the year just in terms of seasonality.
You talked about you know sort of low levels of bankruptcy and you know last year was obviously very muted in terms of what occupancy was lost after the holidays.
Do you have visibility on what that sort of seasonal occupancy decline might look like early this year.
Whether that will be similar to 'twenty, two or more of a historical sort of.
If we think about that occupancy trend throughout the year.
Yeah, we're really going to see occupancy physical occupancy ticked up by the time, we get to the end of the year today, when we looked at physical versus leased occupancy at the end of 2022. It was approaching nearly 3% which is pretty elevated for us Todd.
As our pipeline continues to get built out the new stores.
Start to open and start to pay rent, we'll see that gap start to narrow so I expect physical occupancy will really start to pick up in the latter half of the year, which certainly sets up a good backdrop for our cash flow and NOI growth in 2024.
What about seasonally moving from <unk> to <unk>.
Two into early 'twenty, three right <unk> sort of <unk> are you expecting any seasonal occupancy loss or do you expect this to be another year, where there's just very little muted sort of levels of occupancy loss early in the year.
We'll always see a drop after the fourth quarter.
January is typically when leases roll you bought.
Obviously, you got the temporary tenancies, which are seasonal in nature and those guys may roll off so you'll always see a little bit of a tick down from the fourth quarter to the first quarter.
It could perhaps be a little bit less well, we'll see how that pans out but.
It's just traditional with our business, yes, historically, if you go back over the last 15 or 20 years, it's been a range of 20 basis points to 60 basis points decline between the fourth quarter.
Alright. Thank you thank.
Thanks Todd.
Our next question comes from the line of Mike Mueller with JP Morgan. Please proceed with your question.
Yes, hi.
Scott what is the actual retailer valuation income assumption in the 'twenty three forecast I think he said it was about <unk> <unk> higher year over year, but what what's the number.
Yeah, its about a penny in aggregate very small.
Very hard to predict all cell on you know where these market valuations are going to be but it's.
It's nominal in 2023 to be conservative.
Got it Okay, and then and some of the Densification opportunities that you talked about can you just run through some rough timelines.
Okay.
It's all of those are really going to run.
Some happen the ones I mentioned relating to multifamily it takes a little while to get the entitlement perfected and move forward those gonna mostly hit in 'twenty four 'twenty five as it relates to.
The retail projects, such as she'll sporting goods and our team museum them those would be open late 'twenty three we're into 'twenty four.
So it's a variety we expect to spend about 150 million Mike in in 'twenty, three and I would expect to like him out 24 to get those entitlements are up and going.
[noise] built more might be a little further out there as we perfect. The entitlements there that's probably more like it.
25.
Opening.
24 25 times.
Okay. Thank you thanks.
Our next question comes from the line of Keybanc Kim with Jewish. Please proceed with your question.
Yeah.
Thanks, Good afternoon.
Can you just talk about the trends in operating costs that we should expect in 'twenty three.
And as these costs go up.
And as you pose higher lease spreads I'm curious how much would those higher lease spreads actually.
Translating to the bottom line versus maybe being dissipated into a higher cost.
Our operating expenses will continue to tick up keep and we expect about a 3% to 4% growth in shopping center expenses, that's a range of outcomes from labor.
Labor cost to property taxes Big line item insurance Big line items, So we will see that.
Leasing spreads are kind of independent right.
Manage our expenses and fixed Cam world.
And.
The spreads to your ability to generate pricing power is really driven by growth in occupancy and creating that tension between supply and demand and we think we're there we have started to see spreads over the last couple of quarters in the mid single digit range I think it's reasonable to assume will continue at that level of debt do you disagree yeah, no I I would.
And the one thing I would add Scott is for the first time, probably since pre pandemic, we're starting to see competition for space again, especially in our better centers and that's just by definition, but a drive right up. So you combine competition with increased occupancy we're starting to see it in terms of.
Driving rate.
And.
When you negotiate with tenants how often.
Ah is a topic of crime and safety being elevated when you discuss.
Thing with tenants.
And can you talk about some of the things that.
You've done as a landlord maybe in conjunction with the city to make us safer kind of shopping environment.
Yes, I'll take the second half of that we work with all of our cities pretty closely.
Santa Monica for example, we spent a lot of time with the.
Various people in the city as well as the police chief to try to make sure that we make at Santa Monica place. The safest environment possible for shoppers are we have a lot of urban properties and as a result, we're very sensitive to those issues I think one area that we don't scrimp on as it relates to.
Expenses as security.
And we use one of the biggest firms in the country, if not the world too to handle our security and its something that were in close communication with every single municipality, we do business in.
To be aware of issues that are happening.
Yeah. That's that's really all you can do Doug you can speak to the retailer side of it and and how they're reacting or what kind of feedback you got yes. So we don't really negotiate security when we're negotiating leases, but what I can tell you and this is happening a lot.
We're having the retailers' security departments reach out to us to partner with our security Department and vice versa. So there's meetings as functions there's.
Conventions, if you will that marry up our security and our and the retailer security. So we're starting to see a pretty dynamic partnership there, but it's not really a function of the lease.
Okay. Thank you.
Thanks.
Our next question comes from the line of Craig Mailman with Citi. Please proceed with your question.
Hey.
Just a question on what you guys are baking in from a perspective of delivery times on pieces I mean, our lead times are getting better on that or you guys may be taking or is there some conservatism in the guidance around timing.
Some of that stuff that you're saying could be hidden in the 'twenty three early 'twenty four is there any chance of that hitting earlier on.
Yes, correct.
Tom touched on it probably the most sensitive are the larger spaces are generate a significant amount of rent and just as a practical matter. There is take a fair amount of time to.
Get permitted gift.
<unk> built out and ultimately start paying rent.
You know, we we look at this space by space and we coordinate with the tenants construction department to determine what those estimated rent start dates are on so I'm not sure that weren't necessarily being conservative we're trying to be as realistic as possible because again, we've got a fair amount of the space that came back to us during the pandemic.
It's exciting space, we really want to get it opened as soon as possible, but each circumstance is different each municipality youre dealing with is different so it's.
It's various space by space specific and I think we've got a pretty realistic perspective of when we think that rent is going to start to come online.
Our our labor issues still a bottleneck for your tenants in terms of opening new stores getting.
Employees is that still a insurers that easing up on the margin.
I think it's it's Doug I think it is easing up I mean, we're talking to the retailers all the time and that was a real issue last 12 months to 24 months, but it's really quieted down.
Okay, and then just one last one on that and the supply chain issues that were often discussed in the last 24 months.
Right and just on the financing side you guys had mentioned Scottsdale I'm the new loan there is progressing.
Are you guys looking at the same type of cost that you were at the Investor Day is there anything positive.
Positive or negative on that front to report.
Yeah, Craig on you know during Investor day at that point in time, you know the market was pretty locked out on as we started 22 or excuse me 23.
We have fresh allocation of capital so.
Bond investors are you know back in the game investment banks are starting to form pools transactions are getting done.
Generally we think it's going to be a slow first half of the year and while things have improved at all it'll take a little while for things to start to get back to normal.
Now on all of that said, we've seen a pretty significant rally in credit spreads over the last say four to five months versus the fall.
Obviously, you've seen you know.
Benchmark rates, you know 10 year treasuries five year Treasury bounce all over the place including over the last couple of days with the recent employment report, but net net I think our rates have improved to the extent the refinancing markets are open for certain assets I think generally rates a modestly improved but it's very volatile still.
And that could change on a dime.
The good news is transactions are getting done we've got one refinance complete you've got one refinance expected within the next few weeks and more to follow as we look at the balance of the year, we do think.
That the second half of the year should be much better than the first half.
What do you think is a good placeholder for tiny and rate on that one.
On the Scottsdale alone will close.
Plus in the first quarter and if I were to guesstimate right, it's probably going to be in the low to mid 5% range.
Thank you.
Uh-huh.
Our next question comes from the line of Ronald Camden with Morgan Stanley . Please proceed with your question.
A couple of quick ones, just going back to some of the targets on leverage at the Investor Day.
At the end of 'twenty three.
Trying to tie those comments, what's sort of the sources and uses you talked about sort of $3 15 in <unk>.
And in an operating cash flow.
You take the dividend out that gets you to 160.
You sort of put development spending and you don't really have a lot sort of lapped over just trying to get a sense of if that how we get to that that leverage target is it is it just basically contingent on an equity raise or how to think about it.
Yeah. We if you if you look at that chart that we talked about on Investor Day, We did have a placeholder for a nominal equity raise that doesn't mean, we're committed to raising equity at $13 a share but that was a placeholder in there. If you look at the footnotes in addition, NOI growth.
Certainly as an important component to us ultimately getting our target leverage below 8% or excuse me eight times over the course of the next year or two.
So those are the primary factors on wheat.
<unk> that we're certainly headed down the right path of achieving reasonable NOI and EBITDA growth between now and next year.
Got it and then going back to sort of the refinancing questions just to thaw and Washington Square some of the pay down for that loan only 15 million, but just curious your commentary both generally in terms of what what the Servicers are our are asking for AD and both specifically.
<unk> odd Danbury fair or fashion outlets of Niagara if theres any updates there. Thanks.
Yeah sure. Every every cases specific you know if you look at Santa Monica place, it's an asset where there's still a fair amount of leasing to be accomplished we talked about the art Museum with a couple of other names hopefully to be announced in the near future. If you were to let Craig it had taken that asset to market the outcome would have been.
Radically different so an extension was very efficient for us resulted in no repayment of the loan proceeds again, that's one isolated example, but generally.
You know the extensions have been very efficient from both a liquidity standpoint, as well as our rate standpoint, frankly if.
If you step back and look at what's happened historically, if you look at the fed funds chart when the fed has increased rates.
There's typically been a fairly significant falloff of those rates. Shortly thereafter. So if you think about extensions for three to four years not only is it efficient in the moment.
Efficient from a rate standpoint, because youre not locking yourself into higher rates for a longer period. So well, it's combining not just what we expect in terms of rate, but also taking a look at the inverted yield curve and trying to find the right duration and if you're if you combine those you end up with a three to five year term seems to.
Work best for Us and that's the strategy we've pursued.
And then if you if you look forward you know we do have some financings that we do think we'll be able to get accomplish a couple of the highlights for the balance of the year will be a financing tysons corner towards the end of the year, obviously, a marquee asset for us and we think that should very well likely be a incremental liquidity event for the company.
And we attempted to finance Danbury fair last year the markets closed up on a couple of different occasions, I think it's very realistic to assume over the next several months that we could get that asset finance, it's got an awful lot going for it trending in the in the right direction from an occupancy and absorption standpoint, So I think that's it.
Financing will be able to get accomplished here within probably the next couple of quarters.
Great.
Thank you.
And we have reached the end of the question and answer session I will now turn the call back over to Tom O'hern for closing remarks.
Thank you for joining us today.
Again, we're pleased to report a strong conclusion of 2022, and we look forward to reporting to you over the coming years 'twenty to 'twenty three unfolds.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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