MAC - NYSE

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Third Quarter 2023 Macerich Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Samantha Greening, Director of Investor Relations. Please go ahead.

Thank you, Tom. This morning, we again reported very strong core operating results for the third quarter. Same-center NOI increased 4.8% versus the third quarter of 2022 excluding lease termination income and year-to-date same-center NOI growth, excluding lease termination income is positive 5%. FFO per share for the quarter was $0.44, which was $0.02 less than FFO during the third quarter of 2022 at $0.46 a share, and the $0.44 was in line with consensus for the third quarter. The primary major factors contributing to this quarterly FFO per share change are as follows: One, a $12 million, $0.05 increase in interest expense due to rising interest rates; two, a $3 million or roughly $0.01 decrease in land sale gains relative to the third quarter of 2022. And then offsetting these factors were a positive $9 million change or $0.04 gain in rental revenues, which includes a $7 million increase in top line minimum rent, a $4 million increase in recovery revenue and an offsetting $2 million decline in percentage rent. Once again, these changes are driven by improved occupancy, growth in rental rates and also by a continued conversion from variable rent to fixed rent structures with CAM and tax tenant recovery charges. So we're very pleased with our core NOI growth during 2023 thus far. As we disclosed this morning, we are maintaining the midpoint of our guidance for 2023 funds from operations which is estimated in the range $1.77 to $1.83 per share. We are also reaffirming the range of our estimated same-center NOI growth, which is 3.75% to 4.5%. Our 2023 outlook continues to be anchored by strong operating cash flow generation, which we estimate will be over $300 million before payment of dividends. More details can be found on Page 15 of our Form 8-K Supplemental Financial, which was filed earlier this morning. During the third quarter, we successfully renewed our corporate credit facility. We increased liquidity and capacity on the new facility by $125 million to $650 million and that was up from a prior capacity of $525 million under the former facility. We secured refreshed term for roughly 4.5 years through February 1, 2028, and facility pricing remains unchanged at SOFR+ 2.35%. We are extremely pleased with this execution, especially in light of an extremely challenging bank credit market. We are currently in the process of refinancing 2 maturing joint venture asset loans at Tysons Corner in Northern Virginia and at the Boulevard Shops at Chandler Fashion Center in the Phoenix marketplace. Tysons Corner is expected to be approximately $710 million in total proceeds, half of which is at our share. And Boulevard Shops is expected to be a $24 million loan, also half of which is at our share. We recently defaulted on the early October nonrecourse loan maturity of the Fashion Outlets of Niagara. Due to pending loan defaults for both the joint venture owned Country Club Plaza as well as Fashion Outlets of Niagara, GAAP requires a revaluation of each asset due to the probability of a shortened holding period. As a result, we recognized substantial impairments on both assets within the third quarter totaling just over $250 million. These impairments impact net loss, but do not impact funds from operations. GAAP also requires that we accrue default interest on these nonrecourse loans, as well as on Towne Mall, which is currently in receivership. We do not expect to pay any accrued default interest on any of these, three nonrecourse mortgage loans, which is expected to be reversed once the loans are either restructured or once titled to the underlying mortgaged asset is transferred. We have therefore made an adjustment within our FFO tables to show both the impact with and without this accrued default interest expense. To be clear, we do continue to recognize and deduct from FFO the interest expense at the loan regular interest rate. Only the incremental default interest expense is added back within our FFO tables. Please note that given the confidentiality of ongoing negotiations and discussions, we are not in a position to address the status of either one of these loans at this time. We currently have approximately $665 million of liquidity available today, including $515 million of capacity on our new revolving line of credit facility. Now, I'll turn it over to Doug to discuss the leasing and operating environment.

Thanks, Scott. As Tom mentioned, leasing was very strong in the third quarter both in terms of volume and reporting metrics. Sales were down 1.8% on a rolling 12-month basis. And as discussed last quarter, not a real surprise given the gains we saw in 2021 and 2022. Trailing 12-month leasing spreads remained positive at 10.6% as of September 30, 2023 and that's an increase of 400 basis points when compared to September 30, 2022. When compared -- when coupled with the second quarter, trailing 12-month leasing spreads have actually averaged 11% for the past six months. In the third quarter, we opened 740,000 square feet of new stores which is 3x the square footage we opened in the third quarter of 2022. This brings our year-to-date total store openings to just over 1.2 million square feet, which is about 80% more square footage than we opened during the same period in 2022. In addition to the openings of SCHEELS All Sports at Chandler, Life Time Fitness at Broadway and Target at Kings Plaza that Tom mentioned earlier, there were several other notable openings including Chanel Beauty at Broadway Plaza, Dr. Martens at Los Cerritos and Tysons Corner Center, Johnny Was at 29th Street, Levi's at Arrowhead, Pandora at The Oaks, Tillys at Valley River and 4 MINISO stores at Arrowhead, Chandler, The Oaks and Vintage Faire. In the emerging brands category, we opened Arc'teryx at Tysons Corner Center, Avocado at 29th Street, Brilliant Earth and Reformation at Broadway Plaza, Gorjana at Biltmore, Mango at Los Cerritos and three new stores with Intimissimi at Chandler, Queens and Santa Monica Place. As you can see by the names just mentioned and those mentioned on several earlier calls, the emerging brands category remains a very important category to us. Finding new brands and new uses is a major initiative of the Macerich leasing team, the results of which will attract many different demographics of shoppers and will help to differentiate our centers from those of our competitors. Now, let's look at the new and renewal leases we signed in the third quarter. In the third quarter, we signed 206 leases for 766,000 square feet. Year-to-date, we signed leases for 3.1 million square feet, which is about 300,000 or 10% more square footage than we signed during the same period in 2022. And as we've stated several times, 2022 was a record year for us in terms of leasing volumes. So, to be ahead of 2022, this far into the year is a telling indicator of how strong this year is trending. Notable new leases signed in the second quarter include two Foot Locker superstores, one at Tysons Corner Center and one at Deptford Mall. We signed [Garage] at Washington Square, Mizzen + Main at Kierland, 3 new Pandora stores at Fashion Outlets of Niagara Falls, Stonewood and Valley River. At Flatiron Crossing, we signed DSW in Five Below for a total of 25,000 square feet. These 2 stores will backfill the former Ultimate Electronics space joining Forever 21 and The Container Store and once again a former 120,000 square foot vacant anchor box is now 100% leased. In the digitally native and emerging brands category, we signed leases with FWRD and Warby Parker at Chandler Fashion Center, YETI at Washington Square, an inspiration company at Danbury Fair, Deptford and Freehold Raceway. And lastly, we're very excited to announce the signing of Life Time Fitness at 29th Street in Boulder, Colorado. This will be our 5th deal with this premier fitness and wellness brand and we look forward to the traffic and energy we know they will bring to 29th Street when they open in early 2024. Looking at our 2023 lease expirations, we now have commitments on 84% of our 2023 expiring square footage that is expected to renew and not close with another 13% in the letter of intent stage. For comparative purposes, the 84% committed is 800 basis points better than where we were last quarter. In terms of 2024, expiring square footage were almost 30% committed with another 40% in the letter of intent stage. Again, I'm very pleased to be where we are with our 2023 and 2024 expiring square footage. Given the uncertainty that still looms in the macroeconomic environment, it's good to take this renewal risk off the table sooner rather than later. Turning to our leasing pipeline, at the end of the third quarter, we had 151 leases signed for approximately 2 million square feet of new stores we expect to open during the remainder of 2023 and into 2024 and early 2025. In addition to these signed leases, we're currently negotiating leases for new stores totaling just over 700,000 square feet, which will also open during the remainder of 2023 and into 2024 and 2025. So, in total, that's 2.7 million square feet of new store openings throughout the remainder of this year and beyond. And as always, it's important to emphasize, these are new leases with retailers not yet open and not yet paying rent and these numbers do not include renewals. So, to conclude, our leasing and operating metrics were solid in the third quarter. Leasing volumes were strong, square footage lease continues to outpace 2022 when measured on a year-to-date basis. Leasing spreads remain positive at 10.6%. So, given this and everything Tom and Scott have talked about, we remain optimistic as we look at the remainder of this year, next year and beyond. And now, I'll turn the call over to the operator to open up Q&A.

The first question comes from Greg McGinnis with Scotiabank.

I just want to dig into maintain the guidance and the implied kind of Q4 FFO per share spread, which is fairly wide 10% spread with only 2 months left in the year. It also implies sequential FFO per share growth of 20% to 35%, well above kind of the 10% to 15% average we've seen in past four quarters. So if you could -- any explanation there in terms of what's expected and what's causing that spread? And then if you could also touch on same-store NOI growth slowdown that's kind of implied for Q4, that'd be appreciated?

This is Scott. Yes, reasons for the wide range, percentage rents are really the biggest variable for the balance of the year. We've generally kept our sales flat for the balance of the year in terms of projections. So that given the fact the percentage rents are so heavily weighted towards the fourth quarter, that's always a big variable in terms of how we'll end up. If you look at where we were at in the fourth quarter of last year, we had strong luxury sales for instance, which fueled percentage rents pretty heavily in the fourth quarter of '22. That also combined with the conversion of variable to fixed rent deals, percentage rent is certainly going to be a declining element, so that's going to be a cause for some of the slowdown of same center growth in the fourth quarter. Other factors that are influencing our thinking in the wider range for the rest of the year, we do have some pending tax appeals that are coming down the wire in terms of whether or not we'll be able to recognize those benefits this year or next year. And then lastly, you've seen some pretty volatile changes in our indirect investments in retailers through valuation changes, and so that fundamentally just remains a reason to keep a somewhat wider range than we typically would. So, those are the reasons for the wider range. Those are the reasons the trends in same center NOI in the fourth quarter. And then you asked about the trends overall in FFO. It's a lot of factors that go in there. Obviously, we've seen strong same center growth. We do expect that to decline a bit in the fourth quarter, but there's a variety of factors that go in there. We don't have each one earmarked for you, but hopefully, what I just gave you in terms of same center NOI trends and FFO ranges are helpful.

The next question comes from Jeffrey Spector with Bank of America Securities.

Our next question comes from Samir Khanal with Evercore.

Doug, you talked about the -- I believe it was 700,000 square feet of ongoing negotiations. Maybe talk about how those conversations are going given the macro picture, right? The consumer has been hit with higher inflation, higher rates. So maybe talk sort of big picture, how those conversations are going?

Hey, Samir. It's a good question and I get asked it all the time. It is sort of counterintuitive that given what's going on in the macroeconomic environment and the slowdown in sales that we're still seeing the demand that we're seeing, I think number one it's a testament to our portfolio; and number two, I think the retailers are long-term in nature. We have a very healthy retailer environment out there and they're really taking advantage of some opportunities to take down some real good space and some real good properties. And I mean the result is in the numbers. We're 10% greater than what we were at this time last year and last year was a record setting leasing year in terms of volume. So we expect to break that record again yet this year.

And I guess, Scott, maybe to a previous question on percentage rents. I know you talked about the fourth quarter. But as we look into next year -- I know there was a conversion of variable to fixed, I mean should we expect more of that to happen in '24 at this point?

You'll see some of it, Samir, but not to the extent that you have in 2023. I think you'll see declining trends of percentage rent in '24 for that very reason. But we're down year-to-date, just over 20% in percentage rent, the lion's share of that being converting variable to fixed. And I think we've worked through most of those renewal discussions where we're converting to fixed. I don't expect that kind of order of magnitude next year, but we will see some continued decline.

And just one last one if I may. Your lease term income was up sequentially, I think that's part of guidance. I guess what was driving that? And then maybe talk around sort of how the watch-list looks like in the next year for us?

Yes, lease termination guidance really is being driven by a single transaction. I can't mention, of course, as you can imagine, but that's a transaction we expect to have finalized this quarter. So that was a change of thinking relative to 3 months ago. It was a transaction that was not on the table. So in terms of the watch-list, still remains very healthy, very low, certainly very low relative to where we were heading into the pandemic period, about 85% to 90% less leases and square footage on our watch-list today. And we still, of course, do have a watch-list. We've got 5,000 leases this is in our portfolio. So you're always going to have tenants that you're paying attention to. But I don't think we've got anybody in particular, Doug. Maybe you can expand on it where we're concerned about anything imminent.

No, I think Scott you're spot on. And as I alluded to earlier, there's a really healthy retailer environment out there. And recall pre-pandemic, there were a lot of struggling retailers and the pandemic flushed those retailers out. I mean, if they weren't going to survive for 2, 3, 4 years, they didn't survive the pandemic. So, we came out of the pandemic with a very healthy retailer environment and that exists today.

The next question comes from Floris van Dijkum from Compass Point.

So going back to the SNO pipeline, can you quantify the impact on NOI, the 2 million square feet of SNO represents?

Yes, Floris, our pipeline is now north of $75 million and that is incremental rent versus the uses that are in place today. So that we'll see a little bit of that in 2023 and then the balance of it into 2024 and 2025. That comes from not only the 2 million square feet that are signed, but also the 700 million -- or excuse me, 700,000 square feet of space that's in documentation right now, lease documentation. So, north of 75 million of the company's share over the next several quarters.

The next question comes from Alexander Goldfarb with Piper Sandler.

And then the second question is just on the debt markets overall. Obviously, you guys have coming up Tysons and the Philly mortgages, both of those coming up early in '24. Scott, the recent commentary by sort of everyone this quarter almost suggests like the debt markets are tougher than they were just a few months ago. I don't know if that's a correct interpretation or not. So, in your view, how do the debt markets compare now versus the summer versus earlier in the year? Are they getting better? Have they stalled? Have they gone backwards? Just sort of trying to get an understanding of how the progress in the healing in the debt markets is going.

Just to level set, there's been over $5 billion of mall financings just in CMBS space alone, we've accounted for just over 20% of that. There is liquidity today. Obviously, liquidity comes at a price with the rise in the treasury benchmarks and swap rates, the cost of capital has gone up. But there is liquidity in the market and there's been a significant amount of large and modest sized deals that have been getting done over the last several weeks. Tysons Corner, we do anticipate closing in the fourth quarter very solid asset, very well positioned, and we are very optimistic about the prospects for closing that deal. So liquidity is there, I guess, I would say in summation. It's just there at a relatively higher price.

The next question comes from Michael Mueller with JPMorgan.

This is Hong on for Mike. I guess, my first question would be, would you be able to quantify your exposure to Express?

They're not in our top 10. We're not at liberty to provide specifics. I will say that we have numerous stores throughout the portfolio. But as far as specific exposures, we're not at liberty to provide that right now.

And if I understand your guidance correctly, your lease termination guidance implies a pretty significant step up in the fourth quarter. Is that tied to any tenant in particular?

Yes, I think that question was raised, perhaps you missed it. There is a single transaction that was not contemplated, a few months ago when we updated guidance, that we do expect to close in the fourth quarter, and that's what's driving the change.

The next question comes from Caitlin Burrows with Goldman Sachs.

I think this is actually similar to a question I asked in the past but still wondering. So if I look at the minimum rents in 3Q and strip out the termination income and the straight line rents, it looks like it went down sequentially. And if it wasn't, then we can follow-up on that. But in any case, with the strong leasing spreads and higher occupancy, I would have expected minimum rents to have increased more. So I was just wondering if there's any additional color you can give on why that minimum rent increase wasn't more in the third quarter? Maybe it was just mix of anchor space or timing of openings or taking space offline?

Yes, Caitlin. Minimum rents, as I think I mentioned in my opening remarks, minimum rents were up $7 million when taken both for wholly-owned assets as well as joint ventures at share. So we did see an increase in the third quarter. It was consistent with what we saw in the second quarter driven by a variety of factors, obviously space coming online and starting to pay rent, a bit from leasing spreads and certainly from the conversion of variable rent to top line rent.

Okay. I think I'll follow-up first more on that. And then maybe you could just talk about -- you talked a little bit about the depth of demand and the strength you saw in '22 being even stronger this year. So wondering if you could just talk about the different types of categories and how kind of deep that is and how long it could continue for?

Hey, Caitlin, it's Doug. Yes, we're seeing unprecedented demand. And again, I get asked the question all the time, how long is it going to continue? And quite frankly, we're not seeing any kind of slowdown at all. I mean, our signed leases are really indicative of what we've done in the past, but then kind of looking forward, you look at the deals that we approve. We have leasing committee every two weeks, which is much more forward looking than our signed leases. And I think year-to-date, we are just about where we were maybe a little bit ahead of where we were last year at this time in approving new deals. So, that's kind of a go forward lift. But I do think a lot of this demand comes from -- as I said before, it's a testament to our portfolio, but we just have innumerous depth and breadth of uses that we didn't have before. I mean, you think about digitally native and emerging brands, F&B, restaurants. Tom alluded to some of the large format, the fitness, the grocers, home furnishings, entertainment, health, wellness, beauty, the list goes on and on. So, we've got uses that we've never had in the past and I think that coupled with our portfolio is really driving the demand.

The next question comes from Craig Mailman with Citi.

This is [Seth Bergey] on for Craig. Going back to some of your negotiations. In the past, you've kind of talked about new uses for your space in terms of medical coworker -- co-working grocery and lifestyle. I guess how much of your negotiations are -- like what's the mix between kind of those new uses for your space versus traditional?

Yes, it depends on the property and whether we've got box availability, for example. But I'd say on average, we're probably 40% on the new uses, 60% on traditional. When I say new uses, they can include things like Pinstripes which is a combination of entertainment as well as food and beverage. Some may think of that as traditional, but we think of that as really kind of the new direction of things. Certainly, the likes of Life Time Fitness we consider to be a non-conventional retail use and that's part of that 40% as well. So a lot of those uses as well as the medical uses that you referenced fall in the category of nontraditional retail.

And then just as a follow-up, at a recent conference, you kind of mentioned getting to 94% occupancy by the end of next year and you're already at 93.4%. So how should we think about kind of the pace of occupancy going forward? And as your occupancy improves, how do you think about rents on the remaining space?

So, we're cautiously optimistic. Obviously, the macroeconomic climate is tough right now. The Fed continues to speculation they may bump again this week. Rates are high. There's a lot of global uncertainty, there's a lot of political uncertainty. But based on the leasing environment we see today, I do think we'll get above 94% by the first half of next year, and from there, obviously, that helps with the less capacity, the less availability. And the more capacity we have, the more availability we have, it makes it tougher on leasing spreads. So, as that diminishes when we get back to pre-pandemic levels as we're approaching right now, it really gives us more leverage on negotiating the rents for that remaining space. So, we were double-digit growth in the second quarter, we were double-digit re-leasing spreads in the third quarter and we're cautiously optimistic that's going to continue.

The next question comes from Ronald Kamdem with Morgan Stanley.

Just two quick ones. So one on the sort of the leverage targets that you'd sort of put out during the Investor Day, obviously fast forward today rates are much higher, the stock hasn't really moved to allow for equity issuances and it's hard to sell. How are you guys thinking about sort of those leverage levels? And is it fair to say that those may be able to sort of push back or delay given sort of the macro? Or, is there more common?

Scott here. When we talked at Investor Day in November, I think one of the things we had and there was placeholder for equity issuance, as you noted, we don't have any intention of issuing equity here. So, take that out of the equation, obviously, that influences the leverage targets. But, as we look at NOI growth, we think we'll continue making progress in the next year and get in the realm of the low 8s by the time we get to the end of next year. That's net debt to forward EBITDA. So that does take into account some forward NOI element to our redevelopment pipeline, which kind of makes sense given the fact we're incurring a lot of cost upfront without the benefit of the NOI. So that's our perspective, low rates by the end of next year.

And then just on the same store, I mean obviously, you reiterated the guidance. As we're sort of flipping the calendar, just trying to understand what the puts and takes are, as you're comping into '24, any sense of how much sort of the signed lease not commenced is contributing next year in terms of basis points? Any comments on bad debt? Just what are the puts and takes for that organic growth as we're flipping the calendar? Thanks.

Yes, we're, I'm going to give you the pat line that we're not providing guidance, but I will in terms of the pipeline, Ron. Direct you back to our investor deck from last quarter. There is a disclosure in there about the cadence of our signed but not opened pipeline and as that comes online, what the impact is on '23, '24 and 2025. So that should help you out, at least to get started. But we'll certainly provide you more details at our next call with the typical timing of our guidance issuance in the January, February timeframe.