The Macerich Company Q1 2023 Earnings Call
Okay.
Good day, ladies and gentlemen, thank you for standing by welcome to the Mesa, which first quarter 2023 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone.
Well don't you automatic message advising Johann it's waste please.
Please note that today's conference maybe recorded.
The conference over to you speak of House, Samantha Greening director of Investor Relations. Please go ahead.
Thank you for joining us on our first quarter 2023 earnings call. During the course of this call we'll 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.
Statements regarding projections plans or future expectations.
<unk> 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 in the U S regional and global economies and the financial condition and results of operations of the company and its tenants.
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 on the investors section of the company's website at <unk> Dot com.
Joining us today are Tom O'hern, Chief Executive Officer, Scott Kingsbarns, Senior Executive Vice President and Chief Financial Officer, and Doug Healey Senior Executive Vice President of leasing and with that I'll turn the call over to Tom.
Thank you Samantha.
Pleased to report another strong quarter with our operating results continuing to trend very positively.
Again saw robust leasing demand.
With our first quarter volumes at least being better than the first quarter of last year and just to remind you leasing in 2022 was as good at it as good as it has been in a decade.
Our portfolio average sales per foot for tenants under 10000 square feet was $866 per foot or.
A 3% increase over a year ago.
These strong results were achieved even in the very challenging macroeconomic climate, we are facing today.
Rising interest rates.
Brett about recession and the fall.
Volatile banking and political environments.
Some of the other first quarter results included occupancy at 92, 2%.
It's a 90 basis point improvement from March.
March of 'twenty two.
Though a 40 basis point sequential quarter decline over a year and that is very normal over the past 15 years with only one or two exceptions.
Occupancy has ticked down slightly from year end to the following March 31st the range of decline is typically 40 to 100 basis points.
We continue to see strong leasing volumes, which are in excess of last year's levels for the quarter, we executed 256 leases for nearly a million square feet.
Doug will provide more details in a few moments.
Leasing spreads for the trailing 12 months ended March 31 were up six 6%.
Average rent per square foot at quarter end was nearly $64 6300, 98, that's a two 1% increase over March of 'twenty two.
We saw very solid same center NOI growth of four 8% in the first quarter and that compared to the first quarter of 'twenty, two which was a very strong quarter.
Consistent with our strategy to redeploy capital into our top assets in the fan out or noncore assets yesterday, we sold the marketplace at Flagstaff for $23 5 million.
This is a power center in a noncore market for us.
Since year end, we've had a significant amount of financing activity.
Which Scott will comment on shortly.
That market is still challenging, but our finance team is doing a great job and we're getting our deals done.
Progress continues at our mixed use diversification and Densification projects. Some examples include Carolyn comments in the Phoenix market, we're moving forward with a 110 unit luxury apartment project.
At Flatiron crossing in Broomfield, Colorado, We're planning a 330 unit luxury multifamily projects centered around two and a half acres of public amenity space with 50000 square feet of adjoining food beverage and entertainment.
At Biltmore fashion in Phoenix, we are advancing plans for a 250 unit luxury apartment complex, which will be fully integrated into the heart of this open Air Center.
At our flagship town Center Tysons corner Center, we anticipate receiving approval of our zoning Amendment later, this year, which will pave the way for future additional mixed use development on the site of the former Lord and Taylor.
There are also some recent announcements of great new additions to Santa Monica place, including the Art Museum.
And immersive digital art destination, which will occupy 48000 square feet on the third level that had formerly been a theater box.
We also signed a 10000 square foot lease with Din Tai Fung restaurant to take over the majority of that area that had been the food Court, which is also on the third level of et cetera.
As Doug will elaborate on shortly we continue to be very pleased with the strength of the leasing environment.
On the heels of a very strong leasing results in 2020 to the first quarter of 'twenty three was even better than a year ago at.
The leasing interest continues to come from a wide range of categories, including health and fitness food.
Food and beverage Entertainment sports.
Working hotels and multifamily projects that Carolyn Flatiron Tysons and Billboard.
Interest continues at levels, we've never seen before.
Bankruptcies continue to be at a record low.
We continue to expect gains in occupancy throughout the year and net operating income as we progress through 2023.
And now I'll turn it over to Scott to discuss in more detail the financial results for the quarter and significant financing activity.
Thank you Tom.
Onto the highlights of our quarterly financial results. This morning, we posted strong core operating results for the first quarter same center NOI as Tom just mentioned increased four 8% relative to the first quarter of 2022, excluding lease termination income.
Worth noting that this follows strong NOI growth, averaging seven 4% for the two year period 21 through 2022.
<unk> per share for the first quarter was 40 cents, which was generally in line with our expectations.
Quarterly result was 10 cents less than SSO during the first quarter of 2022, which is 50 cents per share primary.
Primary factors contributing to this quarterly SFO change are as follows one.
A $12 million increase in interest expense due to rising interest rates. This was consistent with our guidance and our expectations.
Two and $11 million decline in lease termination income due to a few larger lease termination agreements executed during the first quarter of last year. In 2022. This was also expected.
Three a $7 million decline in land sale gains given a few larger land sale transactions and the Arizona region of our portfolio. During the first quarter of 2022 again also expected.
And then lastly, a $7 million relative decline in valuation adjustments pertaining to our retailer investments net of taxes.
This negative impact from a noncore passive investment was a surprise within the quarter and it was attributable to a downward valuation adjustment.
Leaning into a single retail company.
Offsetting these factors were the following.
And $8 million improvement in tenant recovery income.
Due to leases converting from variable to fixed rent structures with full fixed cam and tax recovery charges.
And secondly from favorable changes in estimates due to our from 'twenty to yearend recovery income accruals, and then lastly, roughly $4 million improvement in certain miscellaneous income.
<unk>.
Increases in interest expense excuse me interest income parking income and various other sundry items and events.
We are very pleased with the start of 2023 as reflected by the strong core operating results at this time as we disclosed. This morning, we are maintaining our guidance for 2023 funds from operations, which is estimated in the range of $1 75 to $1 85 per share or.
Our 2023 outlook is anchored by strong operating cash flow generation, which is currently estimated at $305 million before payment of dividends.
More details of the guidance assumptions are found on page 15 of the company's form 8-K supplement which was filed earlier this morning.
Now onto the balance sheet.
We continue to make excellent progress on our financing pipeline as Tom just indicated.
On January three we closed a $370 million refinance of the previous $363 million of combined loans that formally encumbered.
Campus at Green acres.
This five year fixed rate MBS loan bears interest at five 9% fixed and is full term interest only.
This five year fixed rate MBS loan bears interest at five 9% fixed and is full term interest only.
On March 3rd we close to $700 million refinance at Scottsdale fashion square. This five year fixed rate MBS loan bears interest at $6 two 1% and is full term interest only this refinance transaction yielded nearly $150 million of liquidity two mace rich in March.
Last week on April 25th we closed a three year extension of the existing $160 million loan on Deptford mall.
With this extension we maintained the existing below market three 7% interest rate.
And the joint venture repaid $10 million of alone, which was roughly half of that at our share of $5 million.
Collectively, including these three transactions I, just mentioned as well as to loan extensions on Washington Square from Santa Monica place during the fourth quarter of last year, we've completed five major loan transactions totaling over $2 billion or $1 4 billion at our company's share.
At yearend, we had a healthy $645 million of available liquidity.
Including available capacity on our credit facility for.
For which only $50 million is outstanding today that.
Debt service coverage was a healthy two six times.
Now I'll turn it over to Doug to discuss the leasing and operating environment.
Thanks Scott.
As discussed on our last call 2022 was a record leasing year dating back to before the global financial crisis when viewed on a same center basis.
And in fact, the first quarter of 2023 continued in the same fashion with extremely strong leasing volumes that actually surpassed 2022.
First quarter sales were basically flat when compared to the first quarter of 2022, and this doesn't come as a big surprise given the massive gains we saw in 2021 and 2022, resulting in comps that are very difficult to sustain.
This was especially evident in the luxury home furnishings and jewelry categories.
Sales per square foot as of March 31, 2023 were 866.
$866, that's up $23 when compared to the first quarter of 2022.
Trailing 12 leasing.
Trailing 12 month leasing spreads remained positive at six 6% as of March 31, 2023, that's an increase of 260 basis points from the last quarter and an increase of 530 basis points when compared to March 31 2022.
In the first quarter, we opened 194000 square feet of new stores.
Notable openings in the first quarter include three stores with box lunch at stone Wood Superstition Springs, and Victor Valley.
Garage at Fresno fashion Fair, Johnny was in Nike live at Country Club Plaza.
Old Navy at Tysons corner Center.
Cotton on kids at Scottsdale fashion square.
<unk> and LASA re dose.
On March 3rd reopened lifetime fitness at Scottsdale fashion square.
This is our second opening with lifetime fitness, the first being at Biltmore fashion Park in 2020.
At Scottsdale Lifetime is 37000 square feet spanning four levels topped by a rooftop Beach club Bistro and lounge, all with spectacular mountain views.
The club has already sold out its membership and will average almost 1000 guests per day.
Lifetime is just another example of our ever expanding health, an ever expanding health and wellness category. It.
There will be an outstanding amenity to Scottsdale fashion square and.
And we look forward to our next opening with lifetime fitness at Broadway Plaza later this year.
And the digitally native and emerging brands category, we opened intimate Sami at Broadway Plaza Lucid motors at the village at Corte Madera, Madison Reed, Caroline comments and Rowan at Country Club Plaza.
And the medical category, we opened north northwest health physicians and Tribeca Pediatrics, both at Atlas Park.
Lastly, in the experiential category and as recently noted within a matrix press release, we opened Doctor Seuss in Canada, Topeka at Tysons corner Center World of Barbie at Santa Monica place and the friends experience at Lakewood.
Now, let's take a look at the new and renewal leases, we signed in the first quarter and the first quarter. We signed 256 leases for just about 950000 square feet.
This is 20% more leases and 59% more square footage that we signed in the first quarter of 2022 and keep in mind 2022 was a record year for us in terms of leasing volumes.
Notable new leases signed in the first quarter includes <unk>.
Arrowhead Towne center in Los Cerritos boss at Scottsdale fashion Square Doc Martens at Tysons corner Center Levi's.
Levi's and Sieracki at Los Cerritos, and HSM at Queens Center.
We also signed seven leases with cotton on Chandler Fashion Center, Deptford Mall Freehold Raceway mall, the ox Tysons corner center, and vintage Faire, and all totaling about 21000 square feet.
Tom mentioned this but I think it's worth reiterating in the food and beverage category, we signed two very prestigious restaurants Din Tai Fung at Santa Monica place.
<unk> at Scottsdale fashion square.
Founded $19 58 in Taiwan, and Typhon operates 170 restaurants in 13 countries.
<unk> worldwide for its steam pork dumplings, Kintigh fun will join the recently announced our <unk> Museum.
The third level of Santa Monica place and we expect the combination of these two to add a great deal of traffic energy and excitement to that third level.
This is our second deal with <unk>, the first being at Washington Square, which opened a huge fanfare and is incredibly successful.
Well if I would tell you is it's a very hip restaurant bar that features southern Italian cuisine with a relaxed Mediterranean vibe.
With units already opened in New York City, Las Vegas, and Santa Monica.
<unk> will open at Scottsdale fashion square, and we will flag one side of what will be a newly created portico share and the Nordstrom wing.
This new entrants with elite Valley service and other amenities will provide direct access to more luxury including the recently announced <unk> store.
And stay tuned for another soon to be announced high end national nationally known restaurant to complement <unk> on the other side of the portico share.
And the digitally native and emerging brands category, we signed leases with Charlie and mango at Lowe's to re dose.
<unk> at Broadway Plaza, and the village at Corte Madera.
Ah at Biltmore fashion Park and to Miss me at Santa Monica place and margin Sandro and fashion outlets of Chicago.
We continue our effort in addressing the 2023 lease expirations as early in this year as possible.
And doing so in the first quarter, we signed over 175 renewal leases with almost a 110 different brands totaling approximately 680000 square feet.
So with that we now have commitments and 67% of our 23 expiring square footage of space that is expected to renew and not close with another 20% in the letter of intent stage.
By comparison at this time last year, we had 56% of our 22022 expiring square footage committed.
In addition, we believe our renewal retention rate for 2023 lease explorations.
Tracking in the high 80% range.
All of these are very strong metrics and as I've stated before given the noise and uncertainty that exists in the macroeconomic environment I remain pleased with these metrics as we are basically taken a great deal of risk off the table in 2023.
Turning to our leasing pipeline.
At the end of the first quarter, we had 158 signed leases for two 3 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 leases for new stores totaling nearly 390000 square feet, which will also open in 2023 2024 and early 2025.
So in total that's nearly $2 7 million square feet of store openings throughout the remainder of this year and beyond.
And again 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.
Let me take just a moment to add some color to this pipeline by naming a few of the retailers and concepts coming soon to our centers later this year into 2024 and early 2025.
Shields, all sports at Chandler Fashion Center.
Target at Kings Plaza in Danbury Fair.
Our team Museum and didn't Tai Fung at Santa Monica place.
Caesars Republic Hotel Air Mezz, and <unk> at Scottsdale fashion square.
Lifetime fitness pin stripes and original Joe's at Broadway Plaza.
Taylor's flagship at South Plains Mall.
Round, one at Arrowhead Towne Center in Danbury Fair.
Prime Mark at Green acres, Tysons corner and Queen Center.
Zara and H and M at Queens Center.
Lidl at Freehold Raceway mall.
Industrious at Carolyn comments kilns at Santana village bone saw brewery at Freehold Raceway Mall, and <unk> Mall Ashley furniture at Kings Plaza.
And a new and expanded flagship Apple store at Tysons corner Center, which will open later this month on the 20 <unk> anniversary of their first ever bricks and mortar store, which was also at Tysons corner Center.
And this list just goes on and on and on.
So the leasing pipeline of new store openings now accounts for almost $64 million of incremental rent in aggregate, which will be realized in 2023, 2024, and 2025 and this incremental rent will continue to grow as we continue to improve new deals and signed new leases.
So to conclude.
Our leasing and operating metrics were very solid in the first quarter.
Leasing volumes were extremely strong outpacing the first quarter of 2022 in terms of number of leases signed square footage in total annual rent thus maintaining a very strong pipeline of stores that will open this year next year and beyond.
As expected occupancy decreased a bit in the first quarter, but is up 90 basis points from a year ago.
Leasing spreads came in at six 6% and should continue to increase as we increase occupancy.
Sales remained on par with the first quarter of 2022 with the first quarter of 2022, showing very strong comps the first quarter of 2021.
Bankruptcies overall remain at their lowest levels since 2015, which is consistent with our significantly reduced tenant watch list.
Therefore, we remain optimistic as we look at the remainder of this year next year and beyond.
And now I will turn it over to the operator to open up the call for Q&A.
Ladies and gentlemen asked a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question Crestar one again.
And it does it has enough time, we ask that you. Please limit yourself to one question and one follow up please standby, while we compile the Q&A roster.
And our first question coming from the line of Derek Johnston with Deutsche Bank. Your line is open.
Hi, everybody. Thank you.
I never do this but I have to actually say something because I've never really seen this meaningful of a dislocation between sound fundamentals.
This valuation so it's.
It's making sure we're not missing anything.
You talk about leasing.
Very strong leasing in first quarter.
Firstly I was wondering if.
And I'm, sorry, if I missed this what percentage of the leasing came from new tenants.
And then the second part of this question is are you seeing.
Any slowdown whatsoever, given the macro environment.
I can take the first one it's Doug So we signed we signed 256 leases.
In the first quarter about 31% of those were new leases with new retailers and about 69%.
New leases.
And then to your question about do we see any slowdown I think the quick answer is no we're not.
And I know, it's kind of counterintuitive given everything thats going on in the environment out there, but we're not seeing it leases. We have signed the tenants are still opening stores. The leases. We have negotiated or are negotiating tenants are pulling back and I think we have a really healthy retailer environment out there if you think about.
Pre pandemic there are a lot of retailers that were struggling many failed most fell during the pandemic and those that came out of the pandemic came out very very healthy. So I think it's a testament to the retailer environment, but I also think it's a testament to our portfolio of shopping centers. We do have must have shopping centers that these tenant wants to be that these tenants want to be.
Derek I'm, a little bit more cautionary.
As it relates it's a great environment I'm incredibly glad that we've got a very strong pipeline because those are contractual deals that will start to pay rent in 'twenty three 'twenty four and beyond as Doug mentioned.
Look where every every time the fed has behaved the way they are behaving now bumping rates. If you go back to $19 55, a recession is followed.
I have no reason to believe this is going to be an exception.
We saw their action again yesterday and so there is pressure I do think we're probably likely headed for a recession, but we're in a very very good position to weather that you had a lot of the things that typically bad things that typically happen in a recession like.
Retail failures as Doug mentioned that happened during COVID-19, So we've never really frankly.
A recession, that's followed a pandemic and this one could be a little a little unique and I think we're very very well positioned for that.
That being said we open every leasing call. We have every two weeks, we meet with the entire leasing team and the executive team the leasing team and we always challenge on what weaknesses are you seeing are your retailers backing off on their open to buys.
<unk>.
And their view there is no slowdown there is no back off and.
The deals just continue to flow in in a very strong pace.
Okay, Thanks, Tom and that makes perfect sense.
All that said I was encouraged to see.
Flagstaff.
Dispose or are you seeing any tightening in the private markets.
There are potentially other interest in some of your noncore assets given the fed's pause.
<unk>.
Volumes may be poised to pick up in the second half and that's an opportunity.
Well Derek as you know, we're an opportunistic seller.
We sold 25, lower quality malls coming out of the financial crisis.
Typically that market gets better when there's more debt available and obviously as we're here as you heard from Scott and others. The capital market's tough right now the debt markets are tough and most of those buyers tend to come in and be leveraged buyers. So I think we'll get a deal done here and there in this environment, but when when capital markets get back.
To a normal type.
Range and capacity I think we're going to see more transactions, but I don't really foresee that for 2023.
Great and just one real quick last one for me and I know I can look it up but.
When when this yields come online and Caesars Hotel I think they are probably at the beginning of 'twenty four if I'm mistaken, but any update would be helpful.
Good afternoon, Derik Scott here.
September 32023 for Sheila so right around the corner, we're excited about that one certainly so.
Caesars Republic, we expect during the first quarter of 'twenty four.
Okay, guys. Thanks, I'll I'll pass the Mic and that's it for me. Thank you.
Eric.
Thank you and our next question coming from the line of Greg Mcginniss from Scotiabank. Your line is open.
Hello, Thanks for taking the question I hope, you're all doing well.
So given the strength of the asset that I guess, we were a little surprised by the six two right on the Scottsdale, along though to be fair. We don't really have many other class a plus.
Secured debt comp so any color on that process and maybe the LTV would be appreciated and can you also share. Some early thoughts on the tysons debt maturing in January and expectations on what you hope to achieve there sure Greg Scott here.
So yes, Scottsdale, we got done at the beginning of March and if you were tracking in what was going on in the market is an extremely volatile time, we actually had a pretty fortunate window.
Given the fact that about two or three weeks later, the regional banking failures started to occur so.
I have every reason to believe that if we hadn't hit that window, we probably would not have been able to close that deal.
So during you know relative to what we were talking about.
At Investor Day, where we said I think you said are expected interest rate would be in the mid to high fives over the course of the next few months credit conditions, just became much more volatile the fed continue to pump rates, which caused credit market spreads gap out. So that's really what contributed to the six 2% intra.
Right, but I will say that we were.
We had a window, we certainly had a window there so I feel I feel good about that.
Tysons corner is very well positioned there is a lot of great things going on.
On a fantastic leasing activity.
If I looked at the existing debt today. It has a very healthy debt yield roughly about 13% plus so I think theres an opportunity there to potentially even upsize it really depends on what the credit conditions are going to be like at that point in time, we will not be going to market on that until mid summer, though so it's a little too.
Early to speak to it.
Okay I guess.
As a follow up here. So there's clearly a healthy level of leasing demand and growing occupancy are you getting any interest from institutional investors or developers, where you might be able to partner or sell some larger parcels to get more aggressive on leverage management is there.
A desire to go on the offensive there do you feel the best path forward is just growing EBITDA.
Well on that Greg whenever we do a multifamily.
Densification for example, we always consider bringing in a partner.
Multifamily developer partner.
Which case, we would do or could do at a variety of ways, but one way would be to contribute our land to the venture. So it's.
It's not necessarily taking cash and paying down debt, but it will drive up EBITDA, which gets you to the same to the same place. So those things. We're considering I think Scott mentioned previously we've been fairly active in selling avail.
Available land that we have in our portfolio and we didn't get some of that reflected in our guidance. This year. So I think youll see us do more of that rather than coming in and tried to sell off big blocks of parcels to other.
Okay. Thanks, and just a final one for me.
So we read a headline that Deptford was actually sent to special servicing and given that you ultimately secured an extension there could you just talk a little bit about that process and maybe your willingness to walk away from the asset level.
Level of demand that you're seeing for for mall that of that.
Quality level.
And then what you see as kind of your negotiating leverage.
Given what appears to me I assume to be sorry limited demand.
My lenders to actually take over any malls.
Yes, So you didn't Deptford mall happened to BSC MBS loan.
A matter of protocol special Servicers are the only ones that have the ability to approve an extension. So the mere transfer of a loan to special servicing is really just a function of process and that's all so it was a very amicable process by which we secured that extension again three years.
At a very favorable three 7% interest rate.
And the process is carrying extension was really a function of what the credit markets are like at that point in time.
Given.
Not necessarily conditions and just the mall space, which is broader conditions conditions within commercial real estate.
And a lot of the friction that's resulted from the regional banking failures. So just was not an opportune time to take that asset to market that said it is extremely well positioned very healthy debt yields and in a normal credit environment. For instance, the first half of 2022, we would've been able to finance that that asset with these.
So.
Again that was just a function of.
Seized up credit market. It was a very well positioned asset in a very amicable process.
Alright, Thanks, Scott Yeah.
Thank you and our next question coming from the line of Mr. <unk>.
<unk> with Bank of America. Your line is open.
Hi, good afternoon.
Same store NOI growth accelerated in the quarter.
Operations, So that's pretty good.
I'm, just curious to hear where you see variability.
That's causing you to maintain your guidance.
It's simply a function of.
It being.
Still early in the year.
Just wondering what the reserves are around.
The fact that item for the remainder of the year Inc.
Yes sure yes, we're very pleased with the way same center NOI started the year at nearly 5% growth. It is very early in the year.
I highlighted a couple of things not only the strong core growth, but also the offsetting.
The decline in one of our retailer investments and so you know.
We've got nine months ahead of US we will continue to assess guidance.
It's very possible that our core growth will continue and we'll be bumping that we're just going to wait to see as the next few months unfold and come back to you.
At this time at the end of the second quarter.
And.
In terms of reserves, just given the relatively healthy environment that we're seeing.
Feel like we're very adequately reserved.
Excuse me as I look at the bankruptcy environment, we still expect to extremely low levels relative to.
History, certainly relative to 2020, but during COVID-19.
I went back and quantified.
The bankruptcies that are really getting a lot of press right now those being bed Bath <unk> beyond Tuesday morning, David's Bridal Party city I think there's over 800 stores that are primarily affecting open air power centers and community centers, we have only two leases with them. Those 1800 that are subject to bank.
Perhaps you so again, a very healthy environment not to say that there won't be any further bankruptcies or fallout, but I.
I think we're very well preserved our reserved on that front.
That's helpful. Thanks.
And this is Jeff.
Smaller to make note of that.
Management operating expenses seemed to tick a bit higher this quarter just wondering if there's any.
England, noting around that.
And if you could provide more color.
Yes, I don't think Theres anything.
Unusual it was in line with our expectation.
It is a new year.
Yeah.
But any organization, you've got promotions and compensation adjustments and so that's that's really what's in there I don't think there's anything unusual in that number but it was in line with our with our expectation.
Got it thank you.
Thank you.
And our next question coming from the line of <unk>.
<unk> <unk> with Evercore ISI. Your line is now open.
Hey, Scott good morning.
Yes.
Question on retailer sales growth. This year I mean, what are you guys budgeting for this year as we think about the percentage rents.
Yes for percentage rents were assuming flat.
It's hard to say what the balance of the year will bring and we felt good.
Good Conservative assumption was to assume flat of course, it's hard to predict with any given retailer will do.
Often times percentage rents are going to be driven by a couple of major factors one.
On luxury tenants are certainly going to drive a good portion of those percentage rents. So we will see what the balance of the year unfolds, there, there's a little bit of a comparable pressure on the luxury sector that Doug outlined in his opening remarks. So that's not to say that theyre not performing extremely well, but I think theyre up against the difficult comp in the first half of the year.
<unk>.
But we do expect to generally percentage rents to continue to decline in my opening remarks I mentioned.
We are seeing a pickup in our tenant recoveries as our leases convert from more variable rent structures driven by pandemic era in negotiations to longer term fixed rate deals with fixed cam and tax recoveries. So we will see percentage rent variable rent continue to decline primarily due to that.
Is it can you are you able to sort of quantify that but maybe a ballpark in terms of how much of a decline to as a percentage.
Say ballpark mid.
Mid teens relative to 2022 would be our current expectation.
Okay got it and then and then my next question is I guess more of a modeling question, but.
There was a loss on the JV income side was that primarily due to that valuation adjustment I just want to make sure.
That we don't carry anything forward. The motto here, yes, two primary things one was that valuation adjustment that I mentioned secondly, we also.
It may be acquiring our partner share of certain assets within an existing joint venture.
As a result that triggered a shorter holding period and an impairment event and then we.
We recognized a $50 million impairment charge that is an unconsolidated JV. So that's showing up there as well we can't speak to the specifics of that transaction, where the partnership but that was also a factor that you are seeing in the numbers.
Got it and then last one for me on this power center that you use.
So.
What was the cap rate on that and I'm, sorry, if I missed that.
Yes, Sameer, we're subject to a confidentiality agreement so we're not going to get into the cap rate discussion, but Scott mentioned in his guidance comments that it's neutral is going to keep our guidance.
<unk> the same so that transactions effectively neutral so if you consider.
What our use of proceeds would be on something like that you can kind of get in the ballpark of what a cap rate might be.
Okay got it thanks, everyone. Thank you.
Thank you and our next question coming from the line of.
Laura has been just come from Compass point. Your line is now open.
Okay.
Hey, guys.
Thanks for taking my question.
Obviously encouraging leasing.
Progress in terms of.
Your leased occupancy increasing by 80 basis points, Doug you talked a little bit about your <unk> pipeline in terms of square footage and in terms of dollar amounts, but in terms of percentage.
Yeah, obviously that square footage.
It's much bigger than the the difference between the physical occupancy in the leased occupancy if you could just.
You previously mentioned about 200 basis points gap between physical and leased occupancy is that still about the same.
Hey, Florida, Scott here, it's actually a little bit higher it's in the mid threes right now and that's really a function of just a very robust pipeline.
And opening is typically don't occur until the latter half of the year. It's actually there is two kind of waves in our business. One is opening for summer. So we'll see probably a greater amount of openings in <unk> than we did in <unk> and then we will see a bunch obviously open up in preparation for holiday 2023, So we've seen the difference between physics.
On lease grow to roughly about three 5% right now.
Thanks, Scott, that's certainly encouraging and particularly that should make you feel good about growth later on this year, maybe if you could also.
Such upon luxury as a percentage of your a malls today and where you could see that growing obviously when we when you had your investor day, we looked at.
Fashion square and saw that luxury there is going to be over a quarter probably of the of the total GLA.
Maybe if you can talk a little bit about the trends that youre seeing.
<unk> the portfolio and how long that will take two to play out as some of these luxury leases, presumably take a longer time before they actually take occupancy.
Thanks, Floris at Scottsdale fashion square is a very unique asset.
It's very few places in the country very few centers in the country or are you going to be able to populate a center with that much luxury.
So overall in our portfolio, it's probably along the lines of <unk>.
5%, depending on how you define the luxury category and not every center is really going to have that I mean, we have some great centers in our top 10.
Where youre not going to have any luxury.
It's still going to be an incredibly successful center doing over a thousand bucks a foot and all you have to do is.
Go back to a few prior supplemental when we ranked all of our assets based on sales per foot and you'll see what I mean so.
A strong category that came raging back after Covid, we saw some great results, particularly at Scottsdale fashion square.
But that can't necessarily be extrapolated to every center because.
Luxury is kind of.
We're very selective and its not going to be in every property.
Okay.
Fair enough, but would it be fair to assume that that percentage could potentially.
Almost double over the next couple of years in your in your centers I mean, it's still a relatively small amount, presumably and maybe queens doesn't have that but.
But some of your your other malls like.
Obviously.
Square and.
Washington Square.
Presumably could.
Well there are some others that are candidates that were considering but that's going to move pretty slowly.
If we're at 5% today I Wouldnt expect to double it in the next five years, it's going to be a slower process than that.
But they are a pretty big impact on our center and they affect a lot of the tenants around them. So theres a lot of collateral benefits when you bring in even just a handful of luxury names.
Great maybe last.
Billboards.
I know that you.
You had the massive Billboard question.
Scottsdale.
<unk> up and running during the Super Bowl, how much more expansion could you see in that kind of.
Of income going forward.
That's a great question Floris because the demand for that type of space.
Space keeps growing and growing and growing and we see it everywhere I mean, we see it at fashion district of Philadelphia, We see it at Santa Monica place, obviously, you saw at Scottsdale and.
It is going to continue to grow and I think be strong incremental revenue for US is there is a nominal amount of capital required to make that happen, but theres, a fair amount of demand and it keeps growing so I think thats going to continue to be a growing and.
More impactful.
Part of our revenue stream as we go go forward very near future.
Thanks Scott.
Thank you.
Thank you and our next question coming from the line of Linda Tsai with Jefferies. Your line is open.
Yes, hi, besides the timing of Scottsdale fashion square refinancing being fortuitous any other additional color on how the regional banking issues might be impacting your refinancing plans for this year.
Yes, Linda there.
Sure.
It's difficult to predict where theyre going to be in six months from now I mean, I looked back too.
The pandemic and in the summer of 2021, there were no transactions getting done by the time, we got to the fall.
Uh huh.
All transactions were getting done and over the course of the next 18 months, leading through spring of 2022, I think there were about $8 to $9 billion of of regional mall transactions and so over a very short period of time the market.
The market changed rapidly and again the pandemic was the source of the turmoil then so.
It's really going to be driven by.
What continues to happen in the space obviously.
There was a major regional banking failure, just last weekend and Theres. Some other names that are in the news I am not going to get into but.
The longer that continues the more skittishness theres going to be and primarily to see MBS markets, but frankly, a little bit on the balance sheet market's Teva is as balance sheet lenders look at their own exposure. So.
It's hard to predict.
But what we've seen is the markets are very elastic and once conditions start to settle there is a fair amount of liquidity once you start to get comfortable at what the right entry point is.
For a for a lender for a creditor I think we'll start to see the markets rebound certainly we're coming.
Hopefully knock on wood it towards the end of the fed rate hiking cycle and that will that will certainly function as a catalyst its just a matter of whether or not theres any other macro economic or macro political events that are going on at that point in time hard to predict.
Thanks for that context, and then does your year end leverage target remain eight four times and what do you expect to issue equity to get there.
Yes, I think that's a good target net H and I would say, we could get to mid eights, which historic Ganic EBIDTA growth, we could improve upon that if we were to issue equity, but I don't think theres any appetite given that we're sitting on $650 million of liquidity and a significant amount of operating cash flow.
Need to raise equity at extremely discounted valuation so I.
I think we can get to the mid eights, just organically with the NOI growth and seeing our same center excuse me are signed but not opened pipeline start to open.
Thank you.
Okay.
Thank you and our next question coming from the line.
Alex Goldfarb Piper Sandler your line is open.
Hey.
Hi, good morning, good morning out there.
So two questions one.
Not sure if the $50 million impairment that you spoke about is the Philly.
Fashion District, but just a question on that project. The partnership loan that you guys had been funding to pay down the first mortgage and I guess that the term loan expires January 24th can you just go over that sort of capital structure in here because that partner loan accrues at 15%, which needs to be paid before you guys get.
Your equity, but you are funding the partner loan so it sort of the same.
One pocket or the other but just sort of curious how this project youre penciling it now versus when you originally underwrote it and where.
Where it stands given.
Yeah that you've been having to pay down the first mortgage with your own capital.
Yes, so effectively all of the economics of that joint venture go to us Alex as a result of that.
And look when we underwrote that asset it was in.
2017, 2018, it was before Covid.
Obviously, a lot of urban areas, including Philadelphia have been slow to recover in terms of the office population.
The FTP is that Theres been no exception, so as we look at that it's a.
It's a project that we think is going to improve over time as we continue to lease up as you know we've announced that we're working with Hps Siena potential arena site and a third of that location, which is very promising and wood.
Helped the entire community there not just the retail, but the entire area and that's still something that's in process and we're very optimistic but obviously the returns today are not what we expected when we bought that asset in 2016 2017.
Do you feel comfortable that the loan and your equity investment that you've put in that youll recover.
Yes, and Theres not a lot of.
Turn it over to Scott in a second there is not a big loan balance on there as we've paid that down that just means there's more cash flow available to us after debt service.
We have every expectation to continue servicing that debt and funding.
Pay downs, yes, no that's that said Tom I mean, I think the most recent pay down you saw which was $25 to $26 million that was simply an embedded an extension right that was tied to some economic hurdles. So it's just the overall process of delevering that asset and reducing our own leverage.
But that's what you're seeing there.
Okay and then the next question is you mentioned a tech investment that took a bad hit in your portfolio can you just give some color on what the total.
Rich investment is in this tech and the tech venture and what the ultimate.
Do you expect to ultimately harvest these or are these being done.
Operationally concurrent with the portfolio that basically is this are these investments trying to enhance the property operations in there sort of things that you are keeping or are you expecting at some point. These are independent concepts that ultimately will be will be sold or acquired or what have you.
Alex said that investment is through venture capital firm fifth wall.
And that was an investment we made about six or seven years ago.
Good funded periodically, but thats when the commitment was made and it was primarily investments in digitally native brands and it was really a strategic partnership between ourselves and fifth wall to give us access to a lot of the emerging and digitally native brands. They did the underwriting and.
It helped us really focus on the ones that they and we thought would be the most successful and would benefit may stretch. So that's the origin of that investment it's not really.
Ongoing investments, if something we committed $2 seven years ago.
We've had some winners that have gone public by us back where we reduced our investment and we've had others that that havent done as well, which is what you would expect from a venture capital investment some winners and some that don't make it and that's where I think the original investment was about $75 million and we're probably.
Our investment in the books is probably down closer to $50 million a day based on either write downs, we've taken or on the other hand buyouts, we've gotten by virtue of some of these retailers going public to you.
Don't have sort of a return like Oh.
Roy or IRR or something that you can talk about do you know nothing that we've disclosed publicly Alex but we're very happy with the investment it's been great strategically in the return has been.
Good as well.
Okay. Thank you very much Tom Thank you.
Thank you and our next question coming from the line of Keybanc Kim with Jefferies. Your line is open.
Thanks, I just wanted to turn to your guidance for a second.
Can you update us on how much land sales are embedded in your 'twenty three guidance.
And also <unk>.
Interest expense.
Sure.
I think I answered that question in the first quarter or excuse me the fourth quarter call.
And I think that the answer is pretty much the same right now we had about nine <unk>.
<unk> benefits from land sales.
Net of tax the tax provision and that was in 2022, and I mentioned I think a few months ago I expected about 40% to 50% of that activity hitting <unk> and 2023 and I think that's probably still in line for.
3% to 50% of what we experienced in 2022.
So that should help you out there.
We recognized about a penny of benefit in the first quarter. So it was kind of level relative to the guidance I just gave you.
And those are going to be lumpy as the year progresses.
<unk>, we have provided guidance no reason to modify the guidance at this point.
I think our interest guidance is sufficient we will continue to address that as well as all the other line item guidance as we move forward.
Can you remind us what that interest expense guidance.
It's on page 15, and I want to save us roughly $322 million.
But page 15, Okay 300 $320 million.
Okay, and just a second question.
Going back to your debt Refinancings, Danbury mall, Niagara a couple near term debt maturities.
Kind of a sense of what kind of proceeds or or interest rates, we should expect.
Yes, I really don't want to speak in detail about any given transaction because we're actually having active conversations with lenders. So it's probably not appropriate.
I would say market rates today.
In the 6% realm.
And you can see what we did in green acres in Scottsdale that will give you an indication on so that's kind of what the market going rate is.
That's probably all I'm at Liberty to talk about right now just given those are active deals.
Okay. Thank you sure.
Thank you and our next question coming from the line of Michael Mueller with Jpmorgan. Your line is open.
Yes, Hi, Scott I was wondering can you give us some color on how you think recoveries should be trending now that occupancies are higher I think pre COVID-19. It looks like they were in the low nineties I think last year, it's about 75% and so far this year, it's a little higher than that maybe low eighty's, but just any color there would be helpful.
Yes, I think we're making pretty good progress and some of that I have highlighted already in some of my commentary on we saw it ticked down during COVID-19, because we were doing.
In many cases some of those renewals.
We're locked in at rates that we frankly, we didnt want to lock in long term nor did our tenants.
Given the uncertain environment so.
Some of those not all of them, but some of them were variable rent structures with very little to no cam.
And oftentimes we are recovering our taxes.
Fast forward to today.
Getting full triple net deals done with fixed Cam with annual escalators and a full tax pass through so our expectation is we're going to start trending back to that low 90% recovery rate that you were just commenting on pre covet.
Yes.
And is that it.
Something you could trend to in a few years do you think.
No I think thats something that we will get to probably within the next year to 18 months or so.
Okay. Okay.
That's helpful. Thank you.
Sure.
Okay.
Thank you and our next question coming from the line of Robbie <unk> with Mizuho. Your line is open.
Hi, there.
Hope you guys are doing well just had one question here.
We saw some data from place there that said that foot traffic enclosed malls and regional malls was down about seven 8% year over year in March I was wondering if you guys have any stats on how foot traffic in your portfolio has trended in margin.
In April .
So we look at it more on a quarterly basis or trailing 12 months and traffic is.
<unk> been fairly consistently at about 95% of pre COVID-19 levels.
So sales have recovered sales are well in excess of pre COVID-19 levels traffic is a little bit lower but the consumers coming and shopping with a purpose probably having done some research online before they get to the to the town centers. So.
Sales is really the important trend.
Traffic is less accurate I would say, but at 95%, we're still pretty pleased and comfortable with that.
As a result of some of these new non traditional retail uses that Doug mentioned like Shiel Sporting goods for example, our team Museum.
Some of those deals that are signed and in the pipeline, but are not open yet once they open we think that theyre going to be big traffic generators and that our numbers will easily surpass what we were seeing pre COVID-19.
Got it got it no that makes sense. That's all for me. Thank you.
Thank you and our next question coming from the line of Caitlin Burrows with Goldman Sachs. Your line is open.
Hi, Good morning, everybody I was just wondering if we look at minimum rents.
It seems like with occupancy and rent per square foot is that by no leasing spreads have all been positive, but some surprise at minimum rents were down. So I was wondering if you could go through kind of what else, we should be considering and what's driving that.
Well I think if you look at minimum rent across both consolidated and unconsolidated assets you'd see that theyre actually Caitlin.
Maybe look at some of the disclosures that are in the 8-K supplemental which kind of breakdown leasing revenue between its various components.
There's a lot of revenue line items that are that are sitting there in the leasing revenue. So for instance, termination income is down significantly.
That's going to cause a decline so I'm not sure if that's getting captured if your eyeballs kind of capturing that but in fact minimum rent is actually up.
A few million dollars quarter over quarter.
I think when I was giving initial guidance about three months ago. I said one of the factors is we are taking some pretty high rent space offline, primarily in some of our New York assets.
And a lot of those benefits are sitting in our signed but not opened a pipeline in terms of the deals that will replace some of the space Thats coming offline, so and as Youre, taking high rent space off youre going to see some traction there, but it is really just just add it's transitional vacancy in and we'll see that pick up later on.
Those spaces come online. So those are a few comments, but I can tell you that if you look at all of our assets at our share minimum rent is actually increasing quarter over quarter.
Okay. Yeah, I mean, I was just thinking because suddenly occupancy I mean, correct me, where I might be not understanding it but occupancy I think is that year over year and rents are up year over year. So if I look at.
Page 14 in the supplement it breaks out total leasing revenue between minimum rents and it goes through consolidated and unconsolidated and the company's total Sharon now, it's $188 million and last year. It was 194. So those are the numbers that I was looking at but maybe just sounds like it's timing.
Why do we why don't we take it offline because maybe we can kind of compare notes and help you out with your answer there.
Okay.
And then maybe just secondly, thinking of redevelopment projects I know you guys have Santa Monica place and the Scottsdale Redevelopments do you guys have other small redevelopment projects going on now for anchor boxes or otherwise.
Yes, we certainly do I mean, they're not extremely material so that end up in our pipeline but.
We've got quite a few exciting openings coming.
For instance, shields, all sports doesn't show up on our development pipeline.
The round one deals lifetime fitness deals don't show up in our pipeline, but those are effectively anchor positions for us.
Just don't rise to the order of magnitude of the development cost being material enough to land on the pipeline. So all of that all of that is embedded in the $64 million that Doug spoke of earlier that will be coming online this year and into next year.
Okay. Thanks sure.
Thank you and I will now turn the call back over to Mr. Tom Wilson for any closing remarks. Thank you well. Thank you for your time today, everyone. Appreciate it.
We're pleased to report strong start to the year and we look forward to seeing many of you at NAREIT next month.
Yes, thank you for joining us today.
Yes.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.
Okay.
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