The Macerich Company (NYSE:MAC) Q4 2022 Earnings Call Transcript

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The Macerich Company (NYSE:MAC) Q4 2022 Earnings Call Transcript February 7, 2023

Operator: Greetings. Welcome to the Macerich Company Fourth Quarter 2022 Earnings Call. I will now turn the conference over to your host, Samantha Greening. You may begin.

Samantha Greening : Thank you for joining us on our fourth quarter 2022 earnings call. During the course of this call, we will be making certain statements that may be deemed forward-looking within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, including statements regarding projections, plans, or future expectations. Actual results may differ materially due to a variety of risks and uncertainties set forth in today's press release and our SEC filings, including the adverse impact of the novel coronavirus on the U.S., regional and global economies and the financial condition and results of operations of the Company and its tenants. 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 web site at

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

Tom O'Hern : Thank you, Samantha. We are pleased to report another strong quarter with the majority of our operating metrics continuing to trend very positively. After a solid first 3 quarters of '22, we had a very strong fourth quarter. We saw robust retailer demand. And although tenant sales were flat in the fourth quarter versus a very strong fourth quarter of '21, we were up 3% for the year. Our average sales per square foot for tenants under 10,000 square feet was $869, a 7% increase over 2021. We continue to see traffic at about 95% of pre-COVID levels, but tenant sales are exceeding pre-pandemic levels with year-to-date sales up 13% compared to the same period in 2019. The quarter continued to reflect retailer demand that is at a level that we have not seen since before the great financial crisis.

Some of the other fourth quarter highlights include occupancy, which ended the year at 92.6%. That was a 110 basis point improvement from the fourth quarter of '21 and a 50 basis point sequential quarter improvement over the third quarter of '22. We continue to see strong leasing volumes, which for the year, were in excess of '21 levels. For the quarter, we executed 261 leases for 900,000 square feet. Doug will be providing more detail on that in a few moments. We saw same-center NOI growth of 2% in the fourth quarter compared to the fourth quarter of '21, which was a very strong quarter and a tough comp. FFO per share for the quarter came in at $0.53. For the year, FFO was $1.96, which was about 3% -- $0.03 ahead of consensus. On January 27, we declared a dividend of $0.17 per share, payable March 3 to record holders as of February 17, '23.

Since our last earnings call, we've had a significant amount of financing activity, which Scott will elaborate on shortly. The debt markets for our A-quality town centers is improving, and we're getting our deals done. We continue to focus on redevelopment and repositioning of our top-quality centers. Much of this work is mixed-use, diversification and densification. Some examples of that include at Kierland Commons, we're moving forward with a 110-unit luxury apartment project which leverages a developable surface parking lot at this highly attractive open-air center. At FlatIron Crossing in Broomfield, Colorado, in partnership with a national residential developer, we are planning a 330-unit luxury multifamily project, centered around 2.5 acres of public amenities.

At Biltmore Fashion, we're advancing plans for a 10-story, 250,000 square foot Class A office tower, including best-of-class retail and food and beverage. Plans are also evolving for a 250-unit luxury apartment complex at Biltmore. At Scottsdale Fashion Square, we're moving forward with plans for multifamily, residential and up to 500,000 square feet of Class A office. This is in addition to the re-merchandising of the Nordstorm wing with luxury brands and dining, which is well underway. At our flagship Tysons Corner Center, we're building upon the highly successful Phase 1 mixed-use development that brought Tysons Tower, Vita and the Hyatt Regency to the center. We are using a portion of our 2.4 million square feet of available entitlements to plan for another mixed-use project.

Also recently, we announced the addition of Arte Museum at Santa Monica Place. Arte is an immersive digital art destination which is expected to occupy 48,000 square feet of space on the third level of the property in the in the former ArcLight theater space. Arte expects to attract 1 million visitors per year. It's a great entertainment addition and a major traffic generator that will bring tremendous energy to the third level of Santa Monica Place. As Doug will elaborate on shortly, we continue to be pleased with the strength of the leasing environment. As expected, given the depth and breadth of the leasing demand, we've had a very robust leasing result in 2022. The leasing interest continues to come from a wide range of categories. That includes health and fitness, such as Lifetime at Broadway and Scottsdale Fashion Square, food and beverage usage, including Pinstripes and Round1, entertainment such as Arte Museum and sports such as Scheels and Dick's Sporting Goods, co-working, hotels such as Caesars Republic at Scottsdale and multifamily projects at Kierland, FlatIron, Tysons.

Interest continues at levels we've never seen before. Bankruptcies continue to be at a record low, and we continue to expect gains in occupancy and net operating income as we progress through '23. And now I'll turn it over to Scott to discuss in more detail the financial results for the quarter, significant financing activity and guidance for '23.

Scott Kingsmore: Thank you, Tom. Now on to the highlights of the quarterly financial results. This morning, we posted solid operating results for the fourth quarter. Same-center NOI increased 2% versus the fourth quarter of 2021, excluding lease termination income. For the year, same-center NOI increased 7.5% versus 2021, excluding lease termination income. This was consistent with our prior estimates and our prior guidance. This is the second straight year of NOI growth that has exceeded 7% with 2021 same-center NOI growing 7.3% over 2020. FFO per share for the quarter was $0.53 and was $1.96 per share for 2022. The quarterly result was equivalent to FFO per share during the fourth quarter of 2021, which was also $0.53 per share.

Similar to our same-center NOI growth result, this FFO result was consistent with our prior estimates and prior guidance. FFO per share exceeded Street consensus, as Tom mentioned, by roughly $0.03 a share. Primary and offsetting factors contributing to this quarterly FFO per share -- this quarterly FFO per share result are as follows: One, we had a $7 million increase in straight line of rent due to straight line rent from the Google lease at One Westside as well as from straight-line receivable write-offs during the fourth quarter of 2021 as we then finalized our remaining pandemic tenant-related receivables last year. Secondly, a $4 million increase from same-center NOI. And third, a $4 million relative improvement in valuation adjustments pertaining to our retailer investments, net of taxes.

Offsetting these 3 positive factors were the following: One, a $7 million increase in interest expense due to rising rates; two, a $5 million quarterly decrease in FFO generated from land sales; and three, a $3 million decline in lease termination income. On to guidance. This morning, we issued our initial guidance for 2023 FFO, which is estimated in the range of $1.75 to $1.85 per share. Here are some details underlying the guidance. This FFO range includes an estimated same-center NOI growth range of 2% to 3%. This FFO range includes an estimated decline in lease termination income from $25 million in 2022 to a more normalized $10 million in 2023. In terms of the quarterly cadence for 2023 FFO guidance, we expect 23% in each of the first and second quarters, 25% in the third quarter, and the remainder in the fourth quarter of 29%.

Primary factors to reconcile between our 2022 actual FFO that we've just reported and this 2023 estimated FFO were as follows: Same-center NOI growth is estimated to contribute $0.08 of FFO. Secondly, $0.05 of FFO is estimated to come from a relative improvement in valuation adjustments pertaining to our retailer investments, net of taxes. These factors are offset by a $0.21 increase in estimated interest expense due to rising rates; secondly, a $0.07 decline in lease termination income; and then lastly, approximately a $0.02 decline in noncash straight line of rental income. To emphasize, our 2023 outlook continues to reflect healthy operating cash flow of roughly $315 million before payment of dividends. More details of the guidance assumptions are included within the company's Form 8-K supplemental financial information specifically on Page 15 that was filed earlier this morning.

Now on to the balance sheet. We continue to make good progress in our financing pipeline. In early December, we closed a 3-year extension of our $300 million CMBS loan on Santa Monica Place. The loan extended -- the extended loan carries a very attractive floating rate of LIBOR plus 1.48%, which is converted to SOFR probably in the next 2 to 3 months. The loan now matures on December 9, 2025, including extension options. On January 3, as we turn the page on the calendar year, we closed a $370 million 5-year refinance of the previous $363 million of combined loans that formally encumbered the Green Acres Commons, both on the mall and the power center, both of which were scheduled to mature in the first quarter of 2023. This new CMBS loan bears a fixed interest rate of 5.9%, is interest only during the entire term and matures on January 6, 2028.

The company's joint venture that owns Scottsdale Fashion Square is in the process of refinancing the existing $405 million mortgage loan. The new 5-year loan is expected to be a fixed rate that will -- the loan balance will be $700 million, and that is expected to generate roughly $150 million of incremental liquidity to the company. The CMBS loan is expected to close within the coming several weeks. At year-end, we had $512 million of available liquidity. Debt service coverage was a healthy 2.7x. Net debt to forward EBITDA, excluding leasing costs, at the end of the quarter was 8.8x. Now I'll turn it over to Doug to discuss the leasing and operating environment.

Doug Healey : Thanks, Scott. We closed out 2022 with very strong leasing metrics and leasing volumes. In fact, 2022 was a record leasing year dating back to before the global financial crisis when viewed on a same-center basis. Fourth quarter sales were basically flat versus fourth quarter 2021. But for the full year 2022, sales were up almost 3% when compared to the same period in 2021. And given the very strong sales volumes we saw in 2021, it was a very difficult year to comp positively against. Sales per square foot as of December 31, 2022, were $869, down just a little from our record $877 at the end of the third quarter. Trailing 12 leasing -- trailing 12-month leasing spreads remained positive at 4% as of December 31, 2022.

Real Estate, Building
Real Estate, Building

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That's down from 6.6% last quarter, and essentially flat when compared to December 31, 2021. In the fourth quarter, we opened 226,000 square feet of new stores. For the full year 2022, we opened almost 900,000 square feet of new stores, which is just about on par with where we were during the same period in 2021. Notable openings in the fourth quarter, including Anthropologie at Biltmore Fashion Park, Aritzia and Timberland at Fashion Outlets of Chicago, Free People at The Oaks, Freebird at Kierland Commons, Lululemon at San Tan Village, North Face at Washington Square and 3 stores with JD Sports at Country Club Plaza, Scottsdale Fashion Square and Victor Valley. In the luxury corridor -- luxury category, we opened Brunello Cucinelli, Dolce & Gabbana and GUCCI Men, all at Scottsdale Fashion Square.

We also opened Shake Shack at Kings Plaza and Capital One Cafe at Country Club Plaza. In the digitally native and emerging brands category, we opened Alo Yoga at Kierland Commons, Brilliant Earth at Santa Monica Place, Everlane and Oak + Fort at Tysons Corner, Fabletics at Broadway Plaza and Chandler Fashion and Vuori at Kierland Commons and Village Corte Madera. Now let's look at the new and renewal leases we signed in the first quarter -- fourth quarter. In the fourth quarter, we signed 261 leases for just over 900,000 square feet. For the full year 2022, we signed 974 leases for 3.8 million square feet. And as I mentioned earlier, 2022 was a record leasing year dating back to before the global financial crisis when viewed on a same-center basis.

Our focus in the fourth quarter was, in large part, addressing our lease expirations, finalizing 2022 and getting a head start in 2023. In doing so, in the fourth quarter, we signed over 200 renewal leases with almost 100 different brands totaling 640,000 square feet. With that, we now have commitments on 52% of our 2023 expiry square footage with another 27% in the letter of intent stage. These figures are virtually unprecedented at this early stage in the year. And given the noise and uncertainty that exists in the macroeconomic environment, I'm pleased with these statistics as we are basically taking a great deal of risk off of the table in 2023. 2022 is also a year of newness for us, bringing new, unique and emerging brands with a major initiative for our leasing team and a way for us to really reimagine and differentiate our town centers from our competition.

To that end, in 2022, we signed over 100 leases with 88 new-to-Macerich brands totaling 440,000 square feet. Examples include Arte Museum, as Tom mentioned, Hermes, Balenciaga, Everlane, Oak + Fort, Parachute, Reformation, Roark, Rothy's and Samsung. That's just to name a few. Turning to our leasing pipeline. At the end of the fourth quarter, we had 140 leases signed for just over 2 million square feet of new stores, which we expect to open in 2023, 2024 and early 2025. In addition to these signed leases, we're currently negotiating nearly 100 new leases for stores totaling about 0.5 million square feet, which will also open in '23, '24 and early 2025. So in total, that's over 2.5 million square feet of new store openings throughout the remainder of this year and beyond.

And I want to emphasize, these are new leases with retailers not yet open and not yet paying rent. And these numbers do not include renewals. And I can tell you that this leasing pipeline of new store openings now accounts for $62 million of incremental rent. And this represents approximately 8% of our current net operating income. And this incremental rent will continue to grow as we approve new deals and sign new leases. So to conclude, our leasing and operating metrics were very solid in 2022. Sales in 2022 outpaced 2021 by nearly 3%, and 2021 was a very strong year to comp against. Occupancy is up 110 basis points since the end of 2021 and up 410 basis points in only 7 quarters since our trough at the end of first quarter 2021, and we expect this trend to continue throughout 2023.

Leasing spreads remain positive and will also continue to improve as we increase occupancy. There are no bankruptcies in our portfolio in the fourth quarter and only 3 for all of 2022. And bankruptcies overall are at their lowest level since 2015, which is consistent with our significantly reduced tenant watch list. Leasing volumes were at record level when viewed on a same-center basis. The result of which is a very strong, vibrant and exciting pipeline of tenants slated to open this year and into '24 and even 2025. I mentioned this last quarter, but I think it's worth repeating. Although the future remains unknown and despite the macroeconomic backdrop and looming potential recession, to date, we continue to see very little pullback from the retailers.

And I think this is the result of the very healthy retail environment that exists today as well as a testament to our best-in-class portfolio of super regional town centers. And now I'll turn it over to the operator to open up the call for Q&A.

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