Q2 2023 The Macerich Company Earnings Call
Okay.
Good day, ladies and gentlemen, thank you for standing by and welcome to the second quarter 2023 main Street's earnings conference call. At this time, all participants are in a listen only mode.
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 on your telephone you weren't didn't hear an automated message it bites in your hands right.
Your question. Please press Star one one again, please be advised that today's conference is being recorded I would now.
Again, the conference over to your Speaker today, Samantha Greening director of Investor Relations. Please go ahead.
Thank you for joining us on our second 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, 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 coronavirus on the U S.
Our regional and global economies, and our financial conditions 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 in the investors section of the company's website at Macerich Shotcaller joining us today are Tom O'hern, Chief Executive Officer, Scott Kingsley, Our senior executive Vice.
<unk> and Chief Financial Officer, and Doug Healey Senior Executive Vice President of leasing with that I turn the call over to Tom.
Thank you Samantha.
It was yet again, another strong quarter for us.
Leasing volumes continued at a record level.
We got an 80 basis point gain in occupancy compared to a year ago at 40 basis point gain compared to last quarter.
We had a five 6% growth in same center net operating income.
And we got double digit positive re leasing spreads.
The U S consumer continues to be incredibly resilient in the face of the challenging macroeconomic climate, we're facing today.
Higher interest rates and the threat of recession.
And we are seeing that at our centers.
<unk>, our shopping eating out and traveling at pre pandemic levels.
Those trends bode well for a quality malls.
Our key operating metrics continued to improve we once again saw robust leasing demand with year to date leasing volumes being better than this time last year and keep in mind leasing in 2022, which is good as it's been in the last decade.
Our portfolio average sales per square foot for tenants under 10000 square feet with $853, which is a very strong level.
Albeit slightly lower than a year ago, mainly due to slower sales compared to 22.
We returned to double digit re leasing spreads up 11% on a trailing 12 month basis occupancy is now at 92.6 at quarter end, and we expect to be above 93% by year end.
As a result of the very strong leasing activity in 'twenty, two but so far in 'twenty three we have an incredibly large leasing pipeline with two 3 million square feet of new store leases signed but not yet opened.
And there's another 500000 square feet of new stores in lease documentation.
What those once those tenants open it will fuel our 24 and 25 same center NOI growth.
As Doug will elaborate on shortly we continue to see unabated strength of the leasing environment.
On the heels of a very strong leasing results in 'twenty to the first half of 'twenty three was even better.
The leasing interest continues to come from a wide range of categories, including health and fitness food and beverage users entertainment retailer sports hotels, and multifamily projects that Carolyn flatiron crossings in Tysons.
Across many categories interest is at levels, we have never seen before.
And so the densification and diversification of our high quality portfolio continues.
Bankruptcies continue to be at a record low.
We continue to expect gains in occupancy and net operating income as we've progressed through 'twenty three 'twenty four.
Now I'll turn it over to Scott to discuss in more detail the financial results for the quarter and financing activity.
Thank you Tom.
We reported very strong core operating results for the second quarter same center NOI increased five 6% versus the second quarter of 2022, excluding lease termination income year to date same center NOI growth is at five 2% as a reminder, this follows strong reported NOI growth.
Seven 4% for the two year period 2021 through 2022.
<unk> per share for the second quarter was 40.
Which was <unk> <unk> less than <unk> during the second quarter of 2022, which was <unk> 46 per share.
Primary major factors contributing to this quarterly <unk> per share change are as follows.
15 million or 7% increase in interest expense due to rising rates.
We had $9 million or four cent decrease in lease termination income, which is primarily due to a major lease termination settlement during the second quarter of last year in 2022.
Offsetting these positive factors are.
We're a $10 million or 5% improvement in rental revenues.
By $10 million increase in top line base rent.
$3 million increase in expense recovery revenue in.
And those were offset by a $3 million decline in percentage rent.
Generally these trends were due to improvements in occupancy.
And from continued conversion of selected leases from variable to fixed rent structures, but full base rent and Cam and tax recovery charges. This is consistent with what we reported in prior quarters.
We are very pleased with our core NOI growth during the first half of 2023 as we disclosed. This morning, we are narrowing the range, but we're maintaining the midpoint of our guidance for 2023 funds from operations, which is now estimated in the range of $1 77, $1 83 per share.
Our 2023 outlook continues to be anchored by strong operating cash flow generation, which we estimate will be $305 million before payment of dividends.
Key elements of our revised growth.
Excuse me key elements of our revised guidance include the following.
An increase in estimated core NOI growth from a range of 2% to 3% to a revised range of $3 75 to four 5% growth. This represents a <unk> <unk> increase.
Proven stay NOI guidance are fairly broad based and are primarily driven by increases in base rent.
Tenant recovery revenues increase in temporary tenant revenues and to a lesser extent improvements in bad debt expense driven by collections of previously reserved receivables.
The expected increases in core NOI guidance totaling five are expected to be offset by the following.
Two and a half cent reduction in investment income, which was driven by a large valuation decline recognized during the first quarter of 2023 from an indirect investment in a single retailer again this was last quarter.
And also by a two and a half cent decline in <unk> driven by two factors one.
An increase in interest expense and to.
Reduced lease termination revenue, it's worth noting that lease termination income is down $21 million or <unk> <unk> year to date in this.
This is largely reflective of the healthy prevailing retail environment that we're in with much less tenant fallout.
In terms of the quarterly cadence for estimated SFO guidance for the second half of the year, we estimate 44% in the third quarter and the remaining 56% within the fourth quarter.
More details of the guidance assumptions are included on page 15, the form 8-K supplemental which was filed earlier this morning.
From a transaction standpoint.
During the second quarter, we secured term extensions of our existing mortgages on Deptford mall for three years and on Danbury Fair for one year. We also sold two power centers in the Arizona market for a combined $29 million.
Market place of Flagstaff is sold in May.
And the superstition Springs Power Center it was sold in July .
In May we acquired our partner's 50% interest in five former Sears parcels at Chandler Fashion Center.
Dan Barry Fair Freehold Raceway, Los Cerritos Center, and Washington Square for a combined $48 million, where we now own 100% of and we control. The repositioning of these five anchor parcels each of which are attached to a quality town centers.
Danbury fair is fully leased to target and prime Mark.
<unk> fashion center in Freehold Raceway are both fully committed and at lease documentation with very diverse retail.
In non traditional retail uses.
Washington Square is entitled and then pre development for our mixed use expansion that will likely include residential hotel dining and retail uses.
Lastly, LOE Cerrado center is being entitled right now for a mixed use expansion that will also likely feature residential hotel dining and retail users.
We currently have approximately $565 million of available liquidity, including $405 million of capacity on our revolving line of credit.
And with that I will turn it over to Doug to discuss the leasing and operating environment.
Thanks, Scott we had another very strong quarter with all metrics, increasing with the exception of sales, which by the way had no negative effect on leasing our leasing volumes.
Sales were down one 6% on a rolling 12 month basis, and this doesn't come as a big surprise given the gains we saw in 2021 and 2022.
Trailing 12 month leasing spreads were 11, 3% as of June 32023, that's an increase of 470 basis points from last quarter and an increase of just over 1000 basis points when compared to June 32022.
In the second quarter, we opened 263000 square feet of new stores, which is about 20% more square footage than we opened in the second quarter of 2022.
This brings our year to date total to just over 450000 square feet, which exceeds where we were at this time last year.
On May 19th 2023, Apple relocated and opened and expanded an incredibly re imagine store Tysons corner Center.
It's the first of its type anywhere in the world I, specifically called out the date because this new opening occurred exactly 22 years to the day after Steve jobs open the first ever Apple store at Tysons corner Center back in 2001.
We also opened a 50000 square foot prime market Green acres mall on long Island.
This marks our fifth opening with Prime Mark in addition to Kings Plaza, Danbury Fair Freehold Raceway and fashion District, Philadelphia when.
When you include their stores at Tysons corner in Queens Center, which will open in 2024, we remain prime marks largest landlord in the United States.
Other notable openings in the second quarter include Louis Vuitton at Broadway Plaza.
Two stores with Lulu Lemon at Arrowhead and most of the re dose.
Alright, and Oliver Smyth Julia at Scottsdale Fashion Square Kendra, Scott at Tysons corner, Barnes and noble at Danbury Fair.
Crunch fitness at Eastland mall in Tempur, Pedic I felt more fashion Park.
And the digitally native and emerging brands category, we opened all birds in Allo Yoga at Broadway Plaza, Psycho Bunny Atlas III dose and Washington Square Travis Matthew the village at Corte Madera, Worby Parker at Santana village Avocado at Washington Square, and bear fruit and bear fruit at Santa Monica place.
Lastly, in the experiential category and as I mentioned on our last call in the second quarter, We opened Dr. Susan Cabinet Tobia.
License corner Center World of Barbie at Santa Monica place and the friends experience in Lakewood.
We're delighted with the traffic interest and excitement these and other experiential concept to generate and will continue to differentiate our town centers by adding these types of usage throughout the portfolio.
Now, let's look at the new and renewal leases, we signed in the second quarter in the second quarter, We signed 191 leases for one 4 million square feet.
Year to date, we have signed leases for $2 4 million square feet, which is about 600000 or almost 35% more square footage than what we signed at this time in 2022.
As Ive stated several times 2022 was a record year for us in terms of leasing volumes.
Notable new leases signed in the first quarter include five below at Valley Mall garage and Levi's at Arrowhead Towne Center, Marge at Scottsdale fashion square and passenger Ricoh at fashion outlets of Chicago.
We signed five new leases with Minoso at Arrowhead, Chandler, Deptford Vioxx and vintage.
On our last call in the food and beverage category, we announced the signing of <unk> at Scottsdale fashion square as we discussed <unk> one side of what will be a newly created portico share and the Nordstrom wing, providing direct access to more luxury including the recently announced <unk> store.
Today I am pleased to announce the signing of the restaurant cash which will join the mix at Scottsdale fashion square in fact, the other side of the portico share directly across from our content.
<unk> has an Asian inspired and globally influenced menu and is known for delivering great food and great service and a lively and vibrant atmosphere.
<unk> currently has seven units open including locations in Las Vegas, New York, Los Angeles, and Aspen look for <unk> to open in 2024 and catch in 2025.
Also in the food and beverage category, we signed leases with Boston Dumpling in North Italia, It looks to re dose as well as bone saw brewery at Freehold Raceway mall.
A couple of calls ago, we discussed our tape museum at Santa Monica place, which we signed to take over the closed Arclight cinema and the third level, We call Art Museum, which is based in Korea is a 50000 square foot immersive and innovative experience by combining art and technology.
RJ Museum will open in 2024.
Directly directly below what will be our Te was bloomingdales, which closed in 2021.
Bloomingdale's was a two level 100000 square foot building with 50000 square feet at each level.
In the second quarter, we signed a lease with club studio to take the entire first level of performing former Bloomingdale's box and we announced this to the public in July .
Owned by La fitness clubs studio, it's L. A is highest and brand and will offer an all encompassing and elite experience for its members were.
We're very excited to welcome club studio to Santa Monica in 2024, as we've seen proof of how high end fitness uses add traffic and energy from early morning to late evening as well as attract complementary uses to the centers in which they land.
Lastly, in the digitally native and emerging brands category, we signed leases with beyond Yoga at Broadway Plaza into Mis immediate Chandler in Corte Madera purple at Los Cerritos shade store at Santana and Travis Matthew also at Corte Madera.
Yeah.
Looking at our 2023 lease explorations, we now have commitments at 76% of our 2023 expiring square footage of space that is expected to renew and not close with another 17% in the letter of intent stage by.
By comparison at this time last year, we had 71% of our 2022 expiring square footage committed so a little bit ahead of where we were in 2022.
And while we put the finishing touches on 2023, we're well on our way in addressing our 2024 explorations.
Turning to our leasing pipeline at the end of the second quarter. We had 151 leases signed for $2 3 million square feet of new stores, which we expect to open during the remainder of 2023, and then into 2024 and 2025.
In addition to these signed leases were currently negotiating leases for new stores totaling just over half a million square feet, which will also open during the remainder of 2023, and then into 2024 and early 2025.
So in total that's $2 8 million square feet of new store openings throughout the remainder of this year and beyond.
And again it is important to emphasize these are new leases with retailers not yet open and not yet paying rent.
These numbers do not include renewals.
The leasing pipeline of new store opening now accounts for almost $66 million of incremental rent in the aggregate, which will be realized in 'twenty three 'twenty four and 'twenty five.
And this incremental rent will continue to grow as we continue to approve new deals and signed new leases and.
In addition to the positive impact on NOI and cash flow. Many of these new users, especially those in larger formats will significantly increase traffic and energy and our portfolio of town centers.
So to conclude our leasing and operating metrics were very solid in the second quarter leasing volumes were extremely strong outpacing the second quarter of 2022 in terms of square footage signed in total annual rent thus maintaining a very strong pipeline of stores that will open this year next year and into 2000.
25.
Occupancy increased 40 basis points sequentially in the second quarter and increased 80 basis points when compared to the second quarter 2022.
Leasing spreads came in at 11, 3% and should only improve as we continue to increase occupancy.
There were only three bankruptcies in the second quarter and bankruptcies overall remain at their lowest level since 2013.
So given all this we remain we remain optimistic as we look at the remainder of this year next year and beyond.
And now I'll turn it over to the operator to open the call for Q&A.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again please.
Please limit to one question and one follow up please standby, while we compile the Q&A roster.
The first question comes from Greg Mcginniss with Scotiabank. Your line is open.
Hello. This is Lee provided here on Greg Mcginniss.
I would also want to ask about your noncore dispositions do you have any additional noncore disposition in negotiations now and how would you characterize the current market conditions given that we are most likely near the peak of interest rate expansion.
No we don't have any factored into our guidance for the balance of the year, we're an opportunistic seller, but typically the sales flow more frequently when the debt markets are stronger than they are today. So I wouldn't expect anything further this year.
Got it and as a follow up some of your noncore assets are owned in Jbs and are your partners to open to selling <unk> are you able to just sell your stake how does it work in your case.
Each joint venture is unique and they've got different provisions in.
Try to elaborate yes, each and everyone.
But generally our partners are happy.
You've done well in these assets generally speaking and to my knowledge Nobody has an interest in selling but I can't speak for them.
Alright.
Most of our noncore assets actually are holding up.
So we don't have those controllers.
Got it and on the land sales side part or do you still expect it to.
To be 40% to 50% over the 2022 level.
Yes, I think thats, an accurate estimate Victor obviously things transaction could spill into one quarter versus another but I would say about a 50% reduction over last year's levels. As you saw in the third quarter and this could have been the reason why some of the consensus estimates Roth, we had zero land sales triggered in the SEC.
Quarter.
Got it thank you very much.
Please standby for the next question.
The next question comes from Craig Schmidt with Bank of America Securities. Your line is open.
Hi, This is actually <unk> on for Craig.
So a few days ago, we did see.
8-K filing.
And with a mixed shelf security offering for LP unit holders.
Just curious if you could provide more detail on the reasoning for.
This announced program.
And I did notice in guidance this duffy.
The sale of common equity.
I just wanted to get your latest thoughts on.
Issuing equity.
Or capital raising going forward. Thanks.
Yes that was just the renewal of a kitchen sink shelf that virtually every public company has available.
They have a finite life and it just was about to expire so we renewed it.
It doesn't really speak to any intentions, we have or don't have regarding using that shelf. It's just a standard tool.
But everyone has and it was time for us to renew it.
I don't believe we do have any any equity issuance in our guidance.
Okay. Thanks for confirming.
Please standby for the next question.
The next question comes from Sanjay <unk> with Evercore. Your line is open.
Hey, Thanks for taking my question.
Other income line was up 40% year on year on the top of the year. So we just wanted some color all tied in Dod and also how should we think about that.
The second half and <unk> 24.
Yes sure. This is Scott I'll go ahead and take that one on other income could get a little bit lumpy periodically if I look at the second quarter other income.
At our share across JV as well as wholly owned assets.
We had a favorable change in valuation adjustments in some of our retail investments that totaled about $4 million.
Also realized some some rebates for some sustainability initiatives so fuel cell programs that we've put in place in the past.
That was consistent with our expectation.
<unk> had increased interest income relative to the second quarter. So those are really the primary driving factors interest you should continue to see is elevated.
The other factors are somewhat hard to predict certainly the change in.
Investment valuations are hard to predict but that's that's the reason for the change.
Good.
Ultimately and then really getting during the first half of this year has been better than what you have done in the past year.
As you continue to build up on the occupancy how do you think about that for the second half and to the floor.
So good observation.
We saw the same trends last quarter year to date, our recovery rates are actually up almost 5% and I think youll see that trend continue and again. This is a concerted effort of us to take a selected portion of leases that were more heavily variable rent oriented and convert those to a more traditional fixed lease structure, which.
<unk> includes fixed Cam and recovery of our property taxes. So youll consider youll continue to see that trend where recovery rates increase that's our expectation for the next few quarters.
Thank you I really appreciate that.
Please standby for our next question.
Our next question comes from Floris Van Dyk come with Compass point Your line is open.
Hey, good afternoon, or good morning for you guys out on the West Coast.
Wanted to just go through I mean, the leasing is clearly continues to be very positive and robust and you've touched on some of the.
The key factors, particularly leasing spreads large ethanol pipeline. So the <unk> pipeline is essentially did I hear correctly increased by $3 million from $64 million I think last last time, you disclosed is the $67 million does that include the additional 500000 square.
We're feet of LOI properties in there and maybe if you can talk about is there a change in rent spreads between renewals versus new leases.
Some more details would be would be helpful.
Good afternoon Flores, Yeah $66 million is the new number that's up about $3 million or so from what we disclosed last quarter and in fact, we.
We started quantifying this a year ago and at that point in time, our SNL pipeline signed but not open and pipeline was 53 million. So it's it has increased about 25% of our last 12 months, which is indicative of exactly what we've been talking to over the last four quarters, which is a very robust leasing environment that pipeline include.
Both signed as well as leases that are in documentation. So for US. It would include the 500000 square feet that were currently documenting.
And then you asked about spreads and the relative change between renewal and new where we're.
We're not disclosing that level of detail I would say that on balance, though our new lease spreads are healthier and more robust as return spaces over to new and more productive retailers than our renewal spreads, but our renewal spreads are still positive.
And maybe if you could also just to follow up on the on my My first question would be you talk about the temp to Perm opportunity and obviously, that's very attractive your NOI essentially doubled from that how much more temp do you have.
Today and maybe.
Provide what it's historically been and getting back to those levels.
You also mentioned, obviously that it impacts your recovery ratio are there other things that we should be thinking about.
Dr. Tim is still over 8%, which on a relative basis is elevated for us.
That's fine we've found it very healthy local and regional merchant environment and I don't think we're unique in that regard. So temper remains elevated which is a great opportunity for us in terms of internal growth drivers to continue to convert those spaces to permanent.
It's a slow moving ship so that doesn't happen overnight, but we do think that especially in the better spaces that are being backfill on an interim basis that there is a really a tremendous opportunity to find some some very good rent growth by converting temporary to permanent uses.
Great and then maybe my second question has to do with with anchor boxes. Obviously, you did the deal with heritage you bought the.
The incremental boxes, maybe you haven't you talked about the amount, which is a lot less I think than the original purchase price if I'm not mistaken, but talk about the IRR expectations, maybe also touch upon what happened to the Jcpenney box.
Queens I believe.
Copper, which is the company that you know.
That got that in the spin from J C. Penney no longer owns that is there any any color you can provide.
Sure I'll I'll touch on those just to look at at anchor leasing. We recently looked at this since 2021, we've leased a million and half square feet of anchor space. We have another 400000 square feet of anchor space that isn't as committed and in documentation such nearly 2 million square.
Feet of anchor space, you can expect with each one of those deals.
Significantly higher sales volume than the than the prior uses and I'm talking about multiples not just times too.
Much larger rents and those are all embedded within our assigned but not opened pipeline and then significantly boost boosted traffic and energy as a result of those users and.
Most of those users have yet to come online theyre going to start coming online in the fourth quarter of this year and over the next 18 months. Thereafter. So we're very excited about that anchor leasing activity again, nearly 2 million square feet.
Of of leasing production.
You asked.
<unk>.
I missed one part of your question and I'll come back to it but you asked about penny at Queens, we do not own that box. It is owned by a third party as we understand that acquired that from.
Out of the Penny bankruptcy, we do understand that they are going through a re merchandising, but we have yet to understand exactly what the plans are we do believe there'll be some very diverse uses that will be coming to the campus.
That may result, also in retaining penny and a smaller footprint so more to come but we're excited about the opportunity just as we're doing to bring new and diverse uses to claims.
Yeah. So Scott the question I had was in the IRR expectations for the.
For the third at JV.
JV buyouts.
Presumably it differs between your your leased properties are stabilized properties.
And the properties that you have yet to be redeveloped.
Healthy returns, we would expect from those Sears boxes.
Some of the ones that are in entitlement, we're still working through.
But in terms of the ones that are at least I would say low to mid teens type of returns.
Great locations Flores, including luxury dose and Washington Square, where we've got the ability to.
Once we get through the entitlement process in all likelihood we will have the ability to add multifamily.
As well as diversified additional retail so there are great opportunities and it's nice to be.
The freedom to redevelop them as we deem most appropriate.
And I apologize.
I spent all my my my follow up question here, a little bit, but you have partners in a couple of those assets will partners want to partner with you on these boxes or will you do that separately will you offer them a chance to.
Do you do it pro rata based on the ownership in the malls.
Well, we've got great relationships with our partners.
Time will tell whether they are interested in coming in or not I mean, we're quite comfortable doing it on our own but I'm sure have an open mind should our partners wish to be part of that.
<unk> part of our projects.
Great. Thanks, guys.
Please standby for the next question.
Yes.
The next question comes from Linda Tsai with Jefferies. Your line is open.
Hi in terms of capital allocation or does the repositioning of the five acre parcel.
Well it fits close to the top of the list Linda because the returns are very good. The expected returns are very good but also it's consistent with our desire to densify and diversify our assets, bringing more traffic more energy different uses and.
Particularly in the cases of Washington Square, and Los Cerritos, it's really going to give us a chance to.
To change the character of the asset.
In both locations, we've got a significant amount of retail space already.
So theres really more advantage to diversifying those with with hotel with multifamily and with other non traditional retail uses.
And then as you head into next year do you expect lease term fees to trend down further and would it become a tailwind to earnings.
Off easier comps.
It's a good question Linda.
It's always a little bit of guesswork, I would say that the guided level of $7 million historically, thats, a low point and so that certainly could become a tailwind.
Often times, you know our retailer will be churning through our brand and focusing their efforts on different types of brands and they will come to us and proactively seek a buyout and sometimes you can fill half of that $7 million order with one termination deal. So we don't have anything eminent but I would.
Say that Thats, probably a trough point relative to history.
Okay.
And then just last one can you discuss general traffic trends in the quarter and what it has looked like since <unk>.
Yes, I mean, we've been trending pretty consistently.
Between 90, and 100% of pre pandemic levels, and that's where we were.
In the second quarter as well fairly consistent with the first quarter.
Okay.
Thanks.
Please standby for next question.
Okay.
Next question comes from Alexander Goldfarb with Piper Sandler Your line is now.
Hey, good morning out there.
So two questions.
First is you guys had a pretty strong jump in your cash same store NOI expectations, but the full year <unk> range was just tightened so where are the offsets that the jump in the same store cash expectations are.
Offset such that <unk> range.
You know it was just tightened not increased.
Good afternoon out there Alex this is Scott.
I'll just refer back to my opening remarks same store NOI resulted in about a 5% improvement.
The other direction, we had the first quarter swing in investment valuations that was about two and a half since decline and SSL and there were a couple of other factors, including increased interest expense and reduced lease termination income that accounted for the other assets that are offsets.
Okay and then the second question is Danbury Fair Mall forgive me for my focus on it but drive past it all the time the parking lot is packed it it's a great asset and yet in your release it it only had a one year extension the interest rate rate went up from.
Six up to like seven five.
So.
Hardly think its an over levered asset, but can you just tell us a little bit more about that asset why it only got the one year extension why the higher interest expense and then also versus Deptford that one at least had a three year extension was able to keep the same sub four interest coupon.
So just if you can give a little bit more perspective, Scott on what youre seeing in the debt markets and why we're seeing this disparity because the Danbury, one just really stands out or maybe my expectations that mall or more than than the actual productivity.
Sure Alex So I guess first and foremost I'm disappointed you aren't stopping and shopping instead of just driving by looking at the full parking life, but if you need a better parking spot just let us know, we'll we'll accommodate you.
But good questions to give you a little overview of what's going on in the financing markets.
We do see them improving.
Year to date as a frame of reference over $3 billion of mall deals have been financed we've accounted for about a third of that.
During the quarter as you noted we did execute on a couple of extensions.
We're on average in the mid fives.
Pensions are very strategic for us.
Allow us to get to a better time to refinance a better more stable climate. If you think about the second quarter. Alex we're on the heels of our regional banking crisis, where credit spreads, where we're gapping out and there is still a lot of volatility so with the pending and looming maturity as of July one it made all since in the world for us to buy in.
Extra year, we're actually active on Danbury I agree with you, it's really a great asset we've spoken to many of the things that are going on there back filling anchor boxes I just talked about targeting prime mark occupying seres and Thats just only one of the few positive events. There. So I do think the asset is very financeable.
I said, we're very active hope to report more in the next quarter or so it's very strategic for us to secure those extensions and buy some time to get to a better climate in the second quarter, just was not the right timeframe for us okay.
Okay, and if I could just slip one more in the lower sales productivity for the for the portfolio. Overall is that just purely driven by the lower EV sales that you referenced at the start or is there something else that's driving the dip in sales productivity.
No I mean, it was it was a pretty modest drop Alex I think it was two years or $3 <unk>.
For foot on a base of 853 is not a very high percentage, but a lot of that the biggest category down with EV sales and they were just very strong in the 12 months ended the second quarter of 'twenty, two and it was down a little bit in 'twenty, three but that ebbs and flows. So that's that's in essence, the cause for the number being less than last year.
Okay. Thank you very much Tom.
Please standby for the next question.
Okay.
Yeah.
The next question comes from Hong Liang, Zhang with J P. Morgan Your line is open.
Hey, guys just to piggyback off of Alex's question, if I look at your near term maturities I see tysons corner and fashion outlets of Niagara could you talk a little bit about your what you intend to do with the debt and which could potentially extend or refinance the debt at <unk>.
Sure I mean, we are in the middle of transactions. So, it's probably not appropriate for me to speak in detail, but again the financing climate is improving.
For instance, Tysons corner.
Show extremely well there have been several large.
Small transactions that have been done and you're probably aware of those I'd say in the last six weeks.
Give or take about 1 billion and a half of mall deals have been able to be transacted. So liquidity is generally being restored in the market and it's really a function of the fed getting to the end of its rate hiking cycle, whether or not they have another.
Quarter left and we'll see.
But liquidity is certainly coming back so the environment is improving and we're actively transacting on a few different fronts right now.
Yeah.
Got it and correct me, if I'm wrong, but I seem to remember you in the past so you're talking about taking additional equity from Tysons corner is that right or am I misremembering.
Yes, I think it's it's very possible, it's going to be a function, where I always look at things at multiple.
Leverage points multiple loan levels, and it's really a function of what that incremental cost of capital is and if it makes sense, but I do think based on todays underwriting criteria and where the asset is performing today, it's very possible to pull some excess capital out yes.
Alright, thank you.
Please standby for next question.
Okay.
The next question comes from Keybanc, Kim with <unk>. Your line is now.
Thanks, Good morning, just a couple quick follow ups here.
You're 11, 3% spread that you've reported.
But our renewables segment of it.
I would presume that somebody.
Some of these older leases that had a bigger percentage of rent component to it as.
Maybe positive aging of tenant sales.
Get renewed at these higher base rates.
Curious about the net economics as some of those higher percentage rents get converted to base rent.
Is the net economics up 11, 3% or is there some loss.
As the leases get signed.
It's a very good question I mean, when we're when we're approving deals every other week key Ben good afternoon and by the way.
We're looking at things on an aggregate rent basis, we're not looking at different components isolated in base rent versus percentage. So.
As we look at those deals generally I would say we've got positive spreads we're not reporting on address.
Gross rent basis.
But I'd say on balance most of our deals see positive rent growth across the board on a total rent basis.
Okay. Thank you for that and just a quick one on the <unk> deal just what is the going in cap rate.
Okay.
We've got a and.
An NDA on that one.
So we're not.
Free to disclose the cap rate.
Okay. Thank you again.
Please standby for the next question.
The next question comes from Handel St Juice with Mizuho. Your line is open.
Hi, there. This is ravi behavior on the line for Hornbill Hope you guys are doing well.
We noticed that net debt to EBITDA came down about half a turn from last quarter can you. Please provide us with an updated leverage target for year end, 'twenty, four and whether or not that target includes any speculative equity issuance.
Yes. This is Scott.
Our target remains around eight times by the time, we get to the end of next year at the end of 2024 that does not include the assumption of any issued equity that's really driven by this.
Very very strong and robust pipeline and growth in EBITA. So that's what we're seeing today.
Perfect just one more here can you. Please disclose the cap rate for the two power centers in Arizona that were sold.
Similarly, we are.
Their NDA on those unfortunately, but.
<unk>, given where the market's rat and where the assets for a position that we just can't comment on the cap rate though.
I will I will say, though on a.
<unk> basis, they were neutral.
Got it thank you.
Please standby for the next question.
The next question comes from Caitlin Burrows with Goldman Sachs. Your line is open.
Hi, good morning there.
Somewhat of a follow up to one of the previous ones on percentage rents. They are meaningfully higher than they were pre COVID-19 looking specifically at the first half of 'twenty versus first half of 19, but even second half 'twenty two versus second half 19. So maybe could you go through what's driving this is it temporary tenants is it a change to the lease structure or a combination and then just wondering.
Going forward should we expect it to come down to kind of what it was and get transferred into base rents or whether there could be some kind of leakage.
Yes, Youre right. Caitlin. This is Scott percentage rents are certainly elevated to where they were pre pandemic I'd break that down into a couple of camps. One just frankly, a more robust sales environment.
Think of the luxury category that certainly driving percentage rents up and I think that will have a lasting effect on percentage rents as a whole, but we've certainly seen those than we predicted they would continue to decrease in 2023 relative to last year.
Certainly seen a decrease in Thats really again, just a function of.
Promoting more traditional leases with fixed rents with fixed cam full recovery is stronger recovery rates. So we will continue to see percentage rents ticked down not only this year, but next year, but I do think there'll be at an elevated level relative to pre pandemic in 2019.
Okay, and then just back to the topic of adding mix you said some of the centers.
Definitely makes sense given the high potential returns there I was just wondering if you could give any sense of what the kind of level of dollar spend could be.
When it is time for that spend kind of how you plan on funding it.
It really is going to depend on case by case, what the returns are Caitlin.
In some cases, we might like the added use we might like the diversification, but we might not like the return in which case, we can potentially.
Sell the land to the developer we can throw in our land for a smaller piece of the deal less than 50 50.
There's a lot of ways to structure these depending on what the.
With the economics are ultimately so.
Order of magnitude on the spend is probably.
50 to 150, depending on how we do it.
But we havent, yet determined whether we're going to ground lease where theyre going to sell whether we're going to partner.
In some cases, we've determined that for example at.
At <unk>, we're going to partner with.
A residential developer will probably ultimately end up keeping along with our partner 50% of the total project, but that's a relatively small capital spend under $20 million.
Got it.
And then maybe one quick one you guys mentioned the world of Barbie that opened at Santa Monica I was just wondering is that a permanent tenant or temporary and if it's like more of a regular lease versus sales based.
Given the hype recently.
There is a lot of hype around it I will tell you.
And a lot of pink had a lot of ink it's very.
Very exciting that is a that is a temporary use to be determined as to how long, but we do expect them to continue for the remainder of this year those temporary entertainment oriented gated attractions have been extremely exciting we opened up a couple in this quarter that being one of them we opened up a.
Doctor Seuss experienced Tysons, which was super cooler super exciting, especially if you're a parent of young kids kids were hopping all over the place of the <unk>.
East wing of Tysons corner recently, and then we opened up the friends experience at Lakewood. Each one of these generates a fair amount of.
Traffic and a good amount of sales for that retailer.
Ask you about the lease structures.
They do pay a very.
Good.
Fixed rent and then oftentimes they come up with a percentage rent structure, where we get the the upside can't speak to any specific one, but generally theyre fixed rent with some percentage rent element too.
Got it okay. Thanks, Yes, please standby for our next question.
The next question comes from Craig Mailman with Citi. Your line is open.
Hey, guys I just want to go back to the debt markets and I don't want to dwell on.
Danbury, but just kind of curious you guys said strategically.
The extension there is that just because you guys had or had four accounts having come in yet you need to control of that asset to kind of get the LTV you need to be able to refinance debt long term and I guess, just more generally kind of what our ltvs that lenders are looking for today debt service coverage.
What's the the underwriting.
Today versus maybe six to 12 months ago.
Sure I'll take both of those this is Scott good afternoon Craig.
Danbury.
So the.
Sears boxes completely outside that collateral so again.
The regional banking crisis cropped up around mid March and with the looming July one maturity it behooves us to secure an additional year of term to get to a less volatile environment.
And to get to an environment, frankly, where there was a better view into when the fed may potentially be increasing are pausing on their rate increases and so that's that's really what drove that very simply it was just to get to a better and less volatile credit environment and so we're approaching that environment like I said, we're actively sourcing finney.
Ensing there.
Your second part of your question in terms of underwriting I'd say today, it's less focused on loan to value because values are a little bit more obscure with a lack of trades in the a quality.
<unk> mall space.
Really its more focused on debt yield and prevailing debt yields dependent upon their desire level leverage level of the developer borrower are generally in that low teens range, but sometimes they may range up into the high teens, if somebody wants to limit the leverage and produced the most efficient cost of capital. So we've we've seen.
Them trend all the way down to 11% over the last I'd say two months worth of mall executions.
That's helpful and then just on the.
The $66 million.
Could you just talk about kind of the capital needs to be spent there relative to what's in the redevelopment pipeline and then maybe what has been spent on Sears just trying to get a sense of kind of current liquidity relative to your in place.
<unk> capital needs relative to your place liquidity to get the external pipeline fully up and running and kind of what that leaves you.
For future deployments in gist.
From a liquidity standpoint, where you guys want to be.
Sure. So Craig I would say and I think this is consistent with what we had mentioned previously we think our development spend will range between 150 875 over the next few years.
It will start to ramp up as we get into more of the mixed use projects, but to Tom's point.
A lot of those mixed use projects will be financed through our land position. So our equity outlay will be relatively minimal.
Those.
Thank you.
Please standby for our next question.
The next question comes from Ronald Camden with Morgan Stanley . Your line is open.
Hey, just two quick one staying on the balance sheet.
Apologies if I missed this and you touched on the fashion outlets of bad Brian Tysons corner sort of those refinancings are coming along.
Indications are looking like.
Sure Yes.
Yes that was.
Somebody had mentioned that previously were not going to speak in detail about each transaction, but I will say that we're actively.
Working on boats, we're actively working on more transactions than just those two and it's really a function of the environment is getting a little bit better liquidity is coming back into the market deals are getting done.
See Unfortunately treasury yields have have gapped out a little bit, but credit spreads have come back and so more and more model deals are getting done I would say over the last two months, we've seen probably $1 billion five or so of those deals and so it's it's getting much more beneficial to transact in todays environment, which again was.
Function of us getting extensions to get to a better environment. So I can't get into details specifically.
One question was asked on Tysons as to whether or not we can borrow excess capital and I said, it's very possible given the conditions of that asset but that's.
That's where we stand on that.
Great and then just the last one on the guidance number one just anything up for 'twenty three that that nonrecurring that we should be thinking about.
As Theyre looking at 24, and then number two is there a way to just quantify how much the benefit from better NOI is off that either interest costs or anything else.
So from 23 would be helpful.
Yes.
There's always one off things in any given year, that's just a constant.
And our business and probably most businesses.
If I was to think top of mind.
Linda asked about termination fees and certainly we're probably not going to hit that $10 million, Mark which is why we've guided down to seven and that seems like a relatively low point and so that could certainly change next year.
I think of.
Our investment valuations and that was one of the reasons for the decline in <unk>. This year those are hard to predict but it is certainly a headwind we're facing this year that could flip and become positive in 2024 like I said, though Ron I mean, there's.
Every year there is something that you could say is nonrecurring and that's that's a constant in our business.
Okay.
Helpful. That's it for me thanks, so much.
Please standby for the next question.
The next question comes from Greg Mcginniss with Scotiabank. Your line is open.
Hey, Thanks for taking the second question.
Just had two quick ones first is on that.
$2 3 million of signed not open occupancy first question on that is that net new space Thats currently unoccupied and two is there an average rent of our NOI.
We can attribute to that pipeline.
Yes, Greg.
So we do provide a disclosure.
Each and every quarter within our investor deck and it shows you the timing of when we expect that space to come online.
So I'd refer back to the first quarter disclosure, which in aggregate was $63 million that represents incremental rent over and above the existing uses if there are any in the spaces that those new stores will open in and so the space could be vacant for the space could be having an existing use in that measure.
There is the incremental rent each year, so I would refer back to that we will certainly update the disclosure to factor and a few million dollars of additional growth in the pipeline, but look back at the first quarter and give you a sense for how thats coming online.
Alright, Great and then I was just hoping to touch on other property revenue again, given the strength of leasing high occupancy at many of your centers are what do you view the opportunity to leverage that success and extract additional revenue from common spaces, whether that's more kiosks advertising partnerships et cetera.
But we see an ever growing demand for example from digital digital signage.
You know a lot of a lot of the advertisers see the.
The traffic they see the energy they see the new tenants that we're bringing in so we've got an ever growing demand on the <unk>.
Digital advertising side of our business. The biggest challenge there is getting the entitlements from the various cities to do it.
But for example, if he came out and walked Santa Monica place you would see there is quite a bit of digital signage and were.
Trying to get more.
So thats, probably our biggest growing area, where we benefit from the great great traffic and great quality of our centers, but theres others, I mean, certainly our ability to attract some of these gated attractions like the trends exhibited in the Barbie exhibit as a function of our great real estate.
Sorry in the entitlement is necessary for that Youre talking about exterior signage I understand yes extra extra exactly.
Thank you.
I show no further questions at this time I would now like to turn the call back to Tom for closing remarks.
Well. Thank you everyone for your time today, we're pleased to report continued strength in our leasing fundamentals as well as strong core NOI growth during the first half of the year and we look forward to reporting to you for the balance of the year. Thanks for joining us today.
This concludes today's conference call. Thank you for participating you may now disconnect.
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