Macerich Co Q4 FY2021 Earnings Call

Good day, and welcome to The Macerich Company Fourth Quarter 2021 Earnings Call. Today's conference is being recorded. Please be advised that this call is scheduled for 1 hour. We ask that you limit your questions to one question and one follow up question. At this time, I would like to turn the conference over to Samantha Greening, Director of Investor Relations. Please go ahead.

Thank you for joining us on our fourth quarter 2021 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 as 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 on the Investors section of the company's website at macerich.com. 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. With that, I turn the call over to Tom.

Thank you, Samantha, and thanks to all of you for joining us today. We are pleased to report an outstanding quarter with virtually all of our operating metrics trending very positively. After battling through a very tough 2020, to see the results we've achieved in '21 is a testament to our team and the quality of our portfolio. We continue to see very significant and accelerating retailer and mixed-use demand. Our shoppers have come roaring back to our centers to shop with a purpose. We see a higher capture rate than pre-COVID with traffic at about 95% of fourth quarter 2019 traffic but with tenant sales exceeding the 2019 levels. In the fourth quarter, we again saw double-digit tenant sales gains, and that's three quarters in a row compared to 2019. Retailer demand is at a level we have not seen since 2015. During 2021, we signed more leases in terms of square footage than we did in 2019, and in fact, the volume equaled the previous high-volume year, which was 2015. In general, 2021 delivered a strong holiday season, with more full-price sales and less promotional strong volumes, even when compared to the 2019 holiday season. We certainly experienced that with our fourth quarter comp tenant sales up 12% versus the fourth quarter of 2019. Some of the quarterly highlights included on a sequential quarter basis, we had occupancy gains of 120 basis points, which is on top of the 90 basis point gains we saw in both the second and third quarters. At year-end, our occupancy level was at 91.5%. We continue to make great progress on pushing occupancy up to pre-COVID levels. Since our low occupancy point in the first quarter of 2021, we've seen 300 basis points of improvement. We saw robust leasing volumes for the quarter and the year, both were in excess of 2019 levels. We executed 3.5 million square feet of space, which compares very favorably to the full year of 2019, which was about 3.4 million square feet of space. Leasing spreads were positive at 4.9% for the trailing 12 months. We saw great same-center NOI growth of 36% in the fourth quarter. That was the third double-digit quarterly gain in a row. We're optimistic heading into the fourth quarter as we raised the FFO guidance range to the midpoint of $1.96. That was a 3% increase on top of the increase in guidance from the previous quarter. Actual FFO per share exceeded the top end of that range and came in at $2.03. And that result was heavily driven by record-setting percentage rents. We continue to ramp up our redevelopment efforts as we move past COVID. During the fourth quarter, in our joint venture with HPP on One Westwood in Los Angeles, we delivered a 584,000 square foot three-level creative office space to Google. We expect Google to open in the summer of 2022. The project remains ahead of schedule and on budget. It is being fully funded with a construction loan. In addition to Google, we have numerous near-term openings with many exciting and prominent large-format users, including, among others, Scheel’s All Sports at Chandler Fashion, Caesar’s Republic Hotel at Scottsdale Fashion Square, Target at Kings Plaza, Lifetime Fitness at both Broadway Plaza and Scottsdale Fashion Square, Pinstripes at Broadway Plaza, and Primark at both Green Acres and Tysons. These projects are expected to be funded with excess cash flow from operations. Focusing now on the leasing environment, the depth and breadth of leasing demand has us very optimistic about 2022 and beyond. The leasing interest we are seeing comes from a wide range of categories, including health and fitness, food and beverage, entertainment, sports, co-working, hotels, and multifamily. All those categories are at interest levels we've never seen before. That is on top of demand from more traditional retailers like Target, Primark, Uniqlo, and Scheel’s. During the quarter, we saw many retailers experience accelerating sales as they get further into the holiday season, and that's something they had not seen in years. In addition, because of the waning COVID restrictions, the importance of physical stores has become more significant to retailers as consumers want a more social, in-person experience of brick-and-mortar shopping. Many retailers have strengthened their balance sheets and are financially in a position to expand their new store openings. The combination of all these very positive factors have us very optimistic about 2022 and 2023. We expect significant gains in occupancy, net operating income, and cash flow this year. And now I'll turn it over to Scott to discuss in more detail the financial results and balance sheet activity.

Thank you, Tom. Now on to the highlights of the financial results for the quarter. Once again, we posted extremely strong operating results in the fourth quarter with same-center NOI increasing 36% relative to the fourth quarter both with and without lease termination income. For the year, same-center NOI growth was 7.3%, including lease termination income and 6.1% excluding lease termination income. Early in 2021 and consistently thereafter, we signaled strong double-digit growth was likely to come during the second half of 2021, and that is, in fact, how the latter half of 2021 played out, with 29% same-center NOI growth within the second half of '21 relative to the second half of 2020. Funds from operations for the quarter were $46 million, or 63% higher than the fourth quarter of 2020. FFO per share for the quarter was $0.53. This was $0.08, or 17% higher than the fourth quarter of 2020 at $0.45 per share, and it also represents a $0.05, or 10% increase over consensus FFO estimates of $0.48 per share for the quarter. This was a very strong earnings quarter. Primary factors contributing to these quarterly NOI and FFO gains are as follows. On the positive front, One, the quarter included a $30 million or $0.19 increase in percentage rents resulting from the continued dramatic increase in sales that we reported earlier today and that Doug will soon explain in more detail; two, minimum rent and tenant recovery income increased by $18 million or $0.11 per share; and three, common area income, which has recovered quite nicely, contributed another $0.07 of NOI and FFO, including from our urban parking garages. As we have noted during the past few quarters, our common area business has recovered beyond our expectations and in 2022, it may surpass pre-pandemic levels. Offsetting these factors were: one, a decrease in noncash straight line of rental income of $29 million or $0.18 per share resulting from the high level of rental assistance granted to our tenants in the fourth quarter of 2020 due to the pandemic; and lastly, the fourth quarter also included a decrease of roughly $0.14 in FFO per share that resulted from the increase in share count due to the common stock sold in 2021 through our ATM programs and it was offset also by the interest expense from the proceeds raised from those equity offerings. This morning, we issued 2022 FFO guidance. 2022 FFO is estimated in the range of $1.85 to $2.05 per share. While certain guidance assumptions are provided within the sub-filing from earlier this morning, here are some further details. This FFO range includes a very healthy same-center NOI growth range of an estimated 4.0% to 5.5%. At the guidance midpoint, we anticipate a $14 million increase in FFO. The guidance also includes an estimated $10 million decline in noncash straight-line rent in '22 versus 2021. So when you exclude that noncash straight-line rent, FFO is estimated to increase by $24 million or 6%, which is an increase of $0.11 per share. Our outlook for 2022 reflects a very healthy increase in operating cash flow, which we've been focusing on for some time now. Given the strong pace of both reported occupancy growth as well as leasing activity, we anticipate that trend to continue beyond 2022. The guidance range assumes no further government-mandated shutdowns of our retail properties. It does not include the issuance of common stock in 2022, and it does not assume any acquisitions or dispositions other than land sale transactions. In terms of the quarterly cadence for 2022 FFO per share guidance, we expect 25% in the first quarter, 22% in the second quarter, 24% in the third quarter, and the remaining 29% within the fourth quarter of 2022. More details of the guidance assumptions are included on Page 17 of the company's Form 8-K supplemental filing, which again was filed early this morning. As for the balance sheet, as part of our continuing commitment to reducing our leverage, in 2021, we reduced our share of debt by an extremely noteworthy $1.7 billion or 20%. During 2021, we generated free cash flow after payment of dividends and recurring capital expenditures of roughly $240 million. We expect continued cash flow growth over the coming years as our business continues to positively rebound post COVID and grow. Net debt to forward EBITDA at the end of 2021 was 9x. This, relative to leverage in the mid-11s at the end of 2020, as a result of the severe disruption from the COVID pandemic. That's a full 2.5 turns of progress in reducing leverage during just the past 12 months and with what we believe is a very clear view to the future operating cash flow and NOI growth. We are well on our way to continued healthy improvement in leverage reduction and getting to our target of a sub-8x net debt to EBITDA. Including undrawn capacity on our revolving line of credit, of which only $96 million of the $525 million aggregate capacity is currently outstanding, we have approximately $622 million of liquidity today. From a secured financing standpoint, in October of '21, we closed a 5-year $65 million refinance of the shops at Atlas Park, which is a lifestyle center near Queens, New York, and we recently closed a $175 million 5-year refinance of Flatiron Crossing, an enclosed regional Town Center in Broomfield, Colorado and the Northern Denver market. As we've mentioned, we continue to see positive progress within the debt capital markets with the execution of a growing number of retail deals on generally improving terms. Now, I will turn it over to Doug to discuss the leasing and operating environment.

Thanks, Scott. We closed out 2021 with very strong leasing metrics and leasing volumes. In fact, 2021 was our strongest leasing year since 2015 when viewed on a same-center basis. I'm going to run through some various metrics and statistics, some of which Tom mentioned in his remarks. And in doing so, we'll hopefully provide a bit more detail and color. Sales were robust in December, and this is on top of a very productive October and November. Fourth quarter sales were up 12% over fourth quarter 2019. All categories, including food and beverage, comped positively during the quarter. This is on top of both the second and third quarters each being up 14% versus 2019. Occupancy at the end of the fourth quarter was 91.5%. That's up 120 basis points from 90.3% at the end of the third quarter. Over the past nine months, portfolio occupancy has increased 300 basis points relative to the 88.5% occupancy rate on March 31, 2021. This pace of recovery certainly exceeds our expectations from early last year. As I stated last quarter, and I still believe given the much healthier retail environment that exists today, coupled with our strong leasing pipeline, we anticipate that occupancy will continue to increase throughout 2022 and into 2023. There were no bankruptcies in our portfolio in the fourth quarter. Trailing 12 leasing spreads were 4.9% as of December 31, 2021. We feel good about the progress we're making on our 2022 lease expirations. To date, we have commitments on 39% of our 2022 expiring square footage with another 55% in the letter of intent stage. In the fourth quarter, we opened 276,000 square feet of new stores. For the full year 2021, we opened 900,000 square feet of new stores, which is about 2% more square footage than we opened during the same period in 2019. I'm actually very pleased about this statistic. If you think about it, the vast majority of 2021 store openings were a result of leasing done in 2019 and 2020, both of which were very difficult and challenging years to lease in given the pandemic and the uncertainties it presented. Notable openings in the fourth quarter include Aritzia at Tysons Corner, Alo Yoga at Scottsdale Fashion Square, Urban Outfitters at Arrowhead and Chandler, Crunch Fitness at Deptford, six stores with Papaya at Arrowhead, Chandler, Desert Sky, Freehold, Scottsdale, and Superstition Springs, and three stores with Windsor Fashion at Flatiron, South Plains, and Victor Valley. In the Luxury category, we opened Marc Jacobs at Scottsdale Fashion, Chanel Face and Beauty at Kierland Commons, and Versace at Fashion Outlets of Chicago. The effort of sourcing new and exciting emerging brands continues to pay off as we open Fabletics, Franki's, and Lucid Motors at Tysons, SimGolf and Warby Parker at Washington Square, Forward at Scottsdale Fashion, Tenshoppe and Tonal at Santa Monica Place and Guess Originals at Los Cerritos. Now let's take a look at the new and renewal leases we signed in the fourth quarter. In the fourth quarter, we signed 146 leases for 0.5 million square feet. For the full year 2021, we signed 833 leases for 3.5 million square feet. As Tom mentioned, this represents the highest square footage leasing volume for Macerich since 2015 when viewed on a same-center basis. Speaking to the diversity of tenant demand we're seeing today, during 2021, we signed 99 new to Macerich tenants, spanning 88 different brands for over 840,000 square feet. Notable leases signed in the fourth quarter include two key renewals with Apple at Fresno Fashion and Los Cerritos as well as new leases with Free People Movement at Village at Corte Madera, TravisMathew at Kierland Commons, and Windsor Fashion at Fashion Outlets of Chicago and Fashion Outlets of Niagara Falls. We signed our first lease with Lidl, a 30,000 square foot international grocer from Germany with 11,000 stores across Europe and most recently in the United States. They'll open at Freehold Raceway Mall in summer 2023, and we look forward to further scaling our business with them. In the home furnishings category, we signed leases with Lovesac at Freehold and Country Club Plaza, Ashley Furniture at Kings Plaza, and Jembro at Green Acres Commons. In the emerging brands category, we signed leases with Fabletics and LEAP at Broadway Plaza and Scotch & Soda at Scottsdale Fashion. Lastly, as we continue to make our centers something for everybody by adding ancillary service uses to traditional retail, we're pleased to announce the signing of the Department of Motor Vehicles at Valley River and the Veterinary Emergency Group at 29th Street in Boulder, Colorado. Turning to our leasing pipeline. At the end of the fourth quarter, we had 133 leases signed for 2 million square feet, which we expect to open in 2022 and 2023. In addition to these signed leases, we're currently negotiating another 93 leases totaling 710,000 square feet, which will open in 2022 and early 2023. So in total, that's over 225 signed and in-process leases totaling 2.7 million square feet of new openings throughout the remainder of this year and into 2023. And I want to emphasize, these are new openings. These do not include renewals. So to conclude, sales continue to be much stronger than they were pre-COVID. Occupancy is up 300 basis points over the past three quarters and is expected to increase throughout 2022 and into 2023. There are no bankruptcies in our portfolio in the fourth quarter, and bankruptcies overall are at their lowest level since 2015, which is consistent with our significantly reduced tenant watchlist. Leasing velocity is at its highest level since 2015, and as evidenced by the 3.5 million square feet we leased in 2021, the result of which is a very strong, vibrant, and exciting pipeline of tenants slated to open yet this year and into 2023. Given the new and emerging brands, brand extensions, and non-retail uses that want to be in our centers, I don't see these trends reversing anytime soon. I believe 2022 and 2023 are going to be very exciting years on the leasing front, years in which we will continue to transform traditional malls into experiential town centers where people want to come to shop, dine, socialize, and be entertained. Now I'll turn it over to the operator to open up the call for Q&A.

First, we'll go to Derek Johnston with Deutsche Bank.

I was hoping you could discuss private markets for a bit. Cap rates are so compressed for residential and industrial assets. Thus, there really seems to be a surging interest in retail right now. Notably, local and grocer is certainly getting a lot of interest. But how is the interest in Town Center assets evolving? Could this perhaps impact your noncore assets and the disposition pace? I say that, especially as 90% of your NOI is derived from your top 30 centers.

Derek, it's a good question, although there certainly have not been any transactions for some time now, certainly in Class A regional malls. So it's really tough to speculate what a cap rate would be because there haven't been transactions. But given, as you mentioned, the very low cap rates in some other sectors, at some point, the regional mall assets on the private side are going to be found to be very attractive. I can't tell you what that is yet because we haven't seen any transactions. But I will tell you if the market returns for some noncore type assets for us, we certainly would be active on the disposition side. You saw us do a couple of dispositions in 2021. Paradise Valley, which is going to be converted from an all mall into mixed-use, as well as a lifestyle center in Tucson we sold last quarter, and that was at about a 5.25% cap rate or so. But other than that, we don't have any transactions that we have seen that we could use as a good basis for speculating what the cap rate might be today on a quality regional mall.

Okay. Great. I guess switching gears, it is a trailing 12-month metric, but rent spreads were positive across the board for the first time since Q3 '20, and that's on a consolidated JV and total basis. Have you reached an occupancy level where you're a little more comfortable and perhaps able to push rents a little more? On the flip side, is the tenant demand and the breadth strong enough to actually get pricing at this point?

Derek, I would say that it's always a fine balance between occupancy and rental rate. Certainly, we were under pressure in the beginning of 2021 when we hit a low point on occupancy of 88% to fill space. I would say that likely in the first and second quarter, we filled space, and it may have cost us a bit on rate. We felt that started to change and balance out in the third and fourth quarters as demand accelerated. We had less space available, which allowed us to balance things between occupancy and rate, and we expect that to continue. Doug, do you want to elaborate?

Yes. To the point of the breadth of tenants, I think that is really going to be a factor in rate in the future. We're leasing to all different sorts of uses, not just traditional legacy retailers, although they're still very important to our portfolio. When you factor in the digitally native emerging brands, tenants we're doing internationally, food and beverage, fitness, entertainment, grocery, health and wellness service, it just adds a whole new dimension of retailers that we have to choose from, which is going to create competition and then ultimately affect the rate.

Moving on, we'll go to Craig Schmidt with Bank of America.

Yes, I wanted to mention the positive news regarding the ongoing strong leasing and the opening of new stores. However, I am concerned about potential staffing challenges for these new locations. It's becoming increasingly competitive to attract new employees due to higher minimum wages, signing bonuses, and a general shortage of workers. Could this be a limitation, meaning that even if the stores are leased, they might not be able to open on schedule?

That's a good point, and it's going to continue to be a challenge for retailers to hire enough qualified people. This is true for nearly every industry today. However, it doesn't seem to be hindering the pace of new store signings and openings. Some of those locations may be a bit understaffed, and the service might not be as good as we would like, but they are successfully getting their stores opened.

Okay. And then just maybe a word on the Bloomingdale's and ArcLight redevelopment. It looks like you're going to be bringing in both entertainment and office. I just wondered what would be on the top floor and which might be on the lower levels that Bloomingdale occupied?

Yes, we are still in the process of that, Craig. As you know, that's a great location. It's right across the street from the end of the train line, great visibility, and it was a two-level Bloomingdale. On top of that was an ArcLight theater. We now have possession of the theater space. It’d be very logical to put another theater up there and then put either one or two new tenants on the first and second floors. We've had a fair amount of demand from creative office users, co-working, as well as more traditional retail. A lot of different choices to make there. You'll be hearing more about that in the quarters to come, but it's a great space. It's a quality situation for us.

And next, we'll go to Samir Khanal with Evercore ISI.

So just on your level of termination income that you're assuming for the year, the $22 million. Just wondering kind of what's driving that? I would have thought maybe that number would have been lower considering the amount of closures that have been sort of at the lowest point here. So maybe Doug or anybody wants to take that? Maybe tell us what maybe the tenant categories that are just driving that number?

Yes, sure, Samir. It's Scott. We've had a few termination settlements that have already triggered actually during the first part of this year, which is one of the reasons why you see the FFO a little bit higher than it would typically be in the first quarter. Given those few transactions, and these are really kind of proactive brand closures from ongoing interest, they've just decided they want to consolidate brands. We've been able to negotiate settlements without naming names. Given those already in and executed deals, we've got some termination income that's unspoken for, but that's really what's driving the high level of termination income in '22.

Got it. And then I guess as a follow-up, just maybe if we can unpack the guidance a little bit. I mean it's a big range. When you think about the sort of the low end and the top end of the range, is there anything that you can provide, whether it’s what you're assuming for occupancy or any other kind of sort of line items here?

Yes. The biggest factor driving the range, and I think you probably heard this earlier this week, too, from one of our peers, is the tenant sales environment. We've made some assumptions in our detailed budgeting that sales are going to be relatively flat versus '21. That could certainly change. That's not a predictor of what's to come. I think that's just a reasonable assumption. If it proves to be conservative, we could certainly exceed our percentage rent estimates in our detailed guidance. Additionally, lease termination income again is a little bit large. We've got some of that spoken for, some of it that's not. We just touched on that, Samir. Lastly, we also have some land sale transactions that are planned to be consistent with where we landed in '21 in terms of those gains and those FFO increases, but those take a lot of planning, entitlement, and due diligence to execute. Those are some of the primary factors that are driving the wider range.

Samir, you asked about occupancy, and we picked up 300 basis points in '21, which is fairly incredible. We're not expecting to be quite that high in '22 and '23, but if you said pre-COVID, our occupancy level was 94%. Today, we're at 91.5%. It's 250 basis points to get back to where we were pre-COVID and on occupancy. I would expect roughly half of that to be picked up in '22 and half in '23. We don't typically give guidance on occupancy, but I'll give you a ballpark there that roughly half of that 250 basis points will be picked up in '22 over the course of '22.

We'll now hear from Alexander Goldfarb with Piper Sandler.

So two questions for me. First, Scott, on the refinancing, certainly, the mall performance, the fact that you guys are exceeding 2019 sales healthily and the leasing volume, et cetera. I would think that would be making the lenders much calmer and in a better mood to do refinancing. Is there something else that's going on as far as the refinancings of the 2020 and 2021? I would think that the lenders should be pretty excited with how you guys have shown the rebound of the malls and the strength of leasing.

Yes, Alex, I think you're reading it correctly. The markets continue to get better quarter after quarter. In fact, we're pretty active right now. We just closed last week, as I mentioned, a loan on FlatIron Crossing. We're active on a few other transactions as well. The CMBS market is very productive right now, both on a single asset as well as a conduit basis. We're seeing some fairly strong interest in that ranges from assets that start at $500 a foot headed north. If you look at our pipeline, we feel pretty good about it. We've got some very high-quality assets coming with maturities like Scottsdale Fashion, like Tysons Corner, and like Green Acres, where we've done a lot of leasing. I think those are going to be very well received in the '23 timeframe. We're extremely active. Banks are out there doing business, debt funds are out there, and even some of the life companies are bidding on high-quality A mall transactions. Given the quality of our portfolio, I feel good about our ability to execute here. We're very active, and we'll continue to report those deals as and when they occur.

Okay. So just reading between the lines, it sounds like the 2020 and the 2021 that are on short-term extensions, those are still being worked through. So I guess I'll wait — that's what it sounds like. My next question is on all the faster crimes that have been in the headlines. Obviously, you guys are not immune. Has there been any impact to leasing as far as tenants reacting one way or the other? I mean, your peer already commented on security expenses going up. Just curious if there's been any fallout on the leasing front, either positive or negative as tenants assess the other locations?

Alex, it's Doug. I'm talking to the retailers all the time. My team is talking to the retailers all the time. I would say the answer to that question is a solid no. As we look at the deals we approve and we bring deals to committee every other week, we're substantially outpacing where we were in 2021. So we have not seen it.

We'll go to Floris Van Dijkum with Compass Point.

Let's take a closer look at the same-store NOI number. You still have your 3% fixed increases, so assuming everything else remains constant, we would expect an overall increase of 3%. However, you may notice some occupancy gains, potentially around 125. It seems you have that open. The pipeline represents about 5% of your total space, roughly speaking. Therefore, there's considerable higher upside potential regarding NOI as I see it. What is your current temporary tenant percentage? I've heard from your peers about the rents for the ten tenants, which seem to have tripled compared to permanent rents. How does that compare in your portfolio?

I mean I would say that you get between 2 and 3 times the rent from a permanent tenant than you get from a temporary. What happened is we did see some good temporary tenant leasing in 2020 and 2021 because we got a lot of that space back very quickly by virtue of the 2020 bankruptcies. It takes a while to generate a permanent lease. We put a lot of that space in the hands of leasing group, and they had more inventory than usual, and they did a great job of filling a lot of that space on a temporary basis. I'd say, temporary occupancy when we were at 88% permanent occupancy, we probably had close to 7% of our space leased on a temporary basis. That's going to shrink and continue to shrink as we convert these leases to permanent leases. Another thing on the same center number, you've got to keep in mind that we're going to get a full-year impact of that 300 basis point gain in occupancy that happened in 2021, but we won't see that economic impact until 2022. In some cases, '23 if there's a delayed opening as a result of an extensive build-out. So that's part of what's driving same center, not just in '22 but should drive it also in '23.

I noticed that while your leasing spreads were positive, which is very encouraging, the average rent size is still below the average in your portfolio. Do you expect your average ABR on new leases to continue to steadily increase? How much ability do you have to push those rents? What has happened to your occupancy costs relative to the last couple of years?

Yes, Floris. Good afternoon. Yes, we would expect average base rent to continue to tick up. When you think of it, especially in the context of some of the COVID negotiations from 2020 where we did some heavy variable rent deals. We will continue to see variable rent convert to fixed rent with fixed annual escalators. So that's exactly where we want to be. I would expect over the course of the next couple of years, as that variable rent converts to fixed, we'll see average base rents continue to tick up. On the cost of occupancy side, we've certainly seen that metric drop with the increase in sales. We haven't reported that, but I would say we're probably at what would be considered a historic low, just given the sales environment today. There's definitely some room to push.

Next, we'll go to Linda Tsai with Jefferies.

Sort of tacking on to Alex's question. Can you discuss how you'll approach the mortgages coming due in 2022? You noted a very healthy refinancing market. But what are the main steps to reach 8x net debt to EBITDA? It sounds like raising equity isn't factored into your guidance.

Well, we continue to chip away at the maturity schedule. Linda, as I look at the debt that is rolling in '22 and 2023, those assets are pretty well positioned. They're generally very high-quality assets. I called out a few earlier. As I look at several of those, they're extremely under-leveraged, which leads me to believe that we'll probably have a net liquidity event over the course of the next 18 months as we refinance ‘22 and ‘23. We're picking those off in order of time date and order of maturity. Again, we're very active in the market, spending a lot of time on it and receiving quite a good reception. I feel good about where we stand right now.

How about the timeframe for getting to 8x?

Well, I think part of that is going to be driven by increasing NOI. We painted a fairly optimistic picture for '22 with our same-center NOI range at roughly 4.75% with the occupancy growth that we're seeing. Again, occupancy being a leading indicator, and you'll see a lot of that cash flow come online later in '22 and into '23. With the pickup in the leasing environment, we really don't see that abating at all. As we continue to grow EBITDA in NOI, we'll continue to see that sub-target become much more of a reality.

I would expect it to happen by the end of 2023. Some of it depends on the pace of NOI pickup but also our ability to sell noncore assets. We quietly went out and sold $150 million worth of assets this year and used those proceeds to delever. I would expect we'll see some of that in '22 and '23 as well, Linda.

Are you getting inbounds in terms of interest for your noncore assets?

Occasionally, we do. Generally, we're out trying to create the opportunity. We do these on a one-off basis. We sold La Encantada lifestyle center in Tucson last year to a local buyer, and we sold Paradise Valley to a local developer. They weren't necessarily marketed deals, but we knew somebody that had a mandate, had capital, and had an interest in those particular assets. We're going to continue to operate that way in '22 and '23. Just to remind you, coming out of the financial crisis, we sold 29 malls. We decided to sell our lower quartile assets. We were successful in selling those 29 centers from roughly 2010 through 2015.

Just one last one. On percentage rents, it seems like those were elevated in the quarter. Would you expect that to kind of remain the case over the next few quarters?

Yes, I think so. Again, we've guided with flat sales assumptions. Over time, as I mentioned to Floris earlier, we'll continue to see percentage rents convert to fixed, and those will naturally tick down. We don't see the sales environment slowing down at this point. I think our assumptions are relatively conservative, and over time, we'll see variable rent continue to tick down to more historic levels probably over the next 2 to 3 years.

And next, we'll go to Hong Zhang with JPMorgan.

Yes. I guess just heading on to Linda's question on the percentage rent side of things. If you're assuming flat tenant sales next year, does that mean you're essentially assuming a similar level of percentage rent in '22?

We're experiencing a decline in percentage rent due to negotiations and converting large store fleets to fixed-rate agreements. We anticipate a decrease in percentage rent in our 2022 guidance. While the sales assumptions may remain flat, the impact varies from deal to deal. Some tenants might pay a higher percentage rent than others. The overall situation is quite diverse; certain tenants may perform exceptionally well, as they did in 2021, resulting in higher percentage rent, making it difficult to predict and budget accurately. Consequently, we're observing a decline in percentage rent in our 2022 guidance because of the shift to fixed rents.

Got it. And I guess on that topic, as you convert tenants from a higher percentage rent component to a higher fixed rent component, is there any slippage in revenue? Or whatever they are, they would be paying percentage rent, would essentially be converted to a fixed rent basis. Does that make any sense?

Yes. Essentially, the percentage rent would get converted to fixed. If anything, there might be a bit of a pickup. So typically, we're going to get the benefit of whatever that percentage rent was. It's just going to come in the form of guaranteed rent, which we'd rather have, and which our lenders would rather see; it's easier for them to underwrite.

That would typically come with the net charges as well, right? So you convert it to base rent to convert it to fixed CAM; you convert it to tax. It's much more of a return to a traditional lease structure.

Got it. If I could sneak one last question in there. Your noncash rent guidance represents a step down from where you used to try historically. Is there anything onetime in nature going on with those lines?

No, not really. It's a function of if we've historically provided rental assistance as a result of COVID to tenants; there was elevated straight line of rent. As you move forward and you flip the calendar year, if there's less rent relief in prior years, then you're going to get less straight line in the subsequent year. It's that kind of natural seesaw relationship. If you look at our '22 guidance, there's basically not a lot of noncash accounting noise in the FFO, which makes it a cleaner underwrite from our perspective. That's what's going on there.

And moving on, we'll go to Greg McGinniss with Scotiabank.

Just been thinking about that trailing 12-month rent spread number at plus 5%. How would that spread be impacted if you included the overage of percent rent that those leases have been achieving as well?

Yes. Good morning, Greg, or afternoon. We haven't quantified that, but it would certainly increase when you add the percentage rent element. We have historically provided our spreads based on just base rent, but we'd probably see a tick up. I don't have a figure for you though. We'd certainly see a tick up there.

Okay. Yes. One of your peers talked about it on their call; it was pretty significant. I just wanted to see if you guys had that, but we can discuss later. Regarding your comment on several assets being under-leveraged, is the expectation that you'll increase the LTV on those assets? What would be the use of those funds? How do you balance that against the pursuit of lower leverage?

Yes. To the extent we borrow in excess of the maturing principal amount, that would go to pay down debt, line of credit, or other variable debt that we're able to pay down without penalty.

And next, we'll go to Rich Hill with Morgan Stanley.

I have a clarification question about sales being flat. This has actually come up a fair amount with your peer. When you talk about sales, are you talking about like gross revenue? Or are you talking about transactions? The reason I mention it is if we're talking about revenue and given the price of a good is up, does that mean transactions are down? Your views that sales will be flat are actually fairly conservative. If you can just maybe talk us through a little bit more what sales being flat actually means? I think that would be helpful.

Yes. When Scott said sales being flat, he was relating that to the percentage rent question. The full universe of tenants doesn't pay percentage rent. Maybe a portion of your tenants are in percentage rent. For him to calculate and make a guidance assumption in 2022, he assumed those tenants that paid percentage rent; their sales would be flat for 2022. I don't believe sales are going to be flat for 2022. We see the momentum we've got. Can it remain at double digits? That's unlikely. But I could easily see sales moving forward at levels between 5% and 10% increase this year. I don't think we're going to lose that momentum. That's a comment that was specific to the percentage rent calculation for guidance purposes.

Got it. We’re taking up a lot of oxygen in the room over the past couple of days, at least, in my… I have a headache from it.

So in other words, Rich, we probably have a conservative percentage rent assumption in the guidance.

Yes, there's a lot of percentages in there. I'll try and steer away from the statement. I would say, it's probably like 0.8x to 0.85x what it was in 2021. I think we're going to see a little bit of a tick down, but I think they'll still remain elevated.

Yes. To share some anecdotal information, at Scottsdale Fashion Square, where we added a luxury wing a few years back, luxury sales struggled in 2020. However, in 2021, many of those brands saw sales that were double what they recorded in 2019, and in some instances, triple. These luxury brands ended up relying on percentage rent more than we anticipated, and likely more than they did as well. We don't expect this trend to last indefinitely. Therefore, we adopted a cautious approach when creating our forecast and guidance related to percentage rent, which is why we have a broad range.

Okay. Thank you. And that does conclude our call. We'd like to thank everyone for their participation. You may now disconnect.