Macerich Co Q3 FY2022 Earnings Call

Good day and welcome to the The Macerich Company Third Quarter 2022 Earnings Call. This call is being recorded. And now at this time I'll turn the conference over to Samantha Greening. Please go ahead.

Thank you for joining us on our third 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 SEC, which are posted in the investor section of the company's website at macerich.com. Joining us today are Scott Kingsmore, Senior Executive Vice President and Chief Financial Officer, and Doug Healy, Senior Executive Vice President of leasing. With that, I'll turn the call over to Scott.

Thank you, Samantha. Good morning and good afternoon. Unfortunately, Tom is missing this call, as yesterday he had a death in his immediate family. At this time, we send Tom and his family our love, support, thoughts, and prayers. We are pleased to report another strong quarter with the majority of our operating metrics trending very positively. After a very strong first half of 2022, we also had a solid third quarter. We saw robust retailer demand; tenant sales were flat in the third quarter. However, our portfolio average sales for tenants under 10,000 feet were $877 per foot, our highest level ever. We continue to see traffic at about 95% of pre-COVID traffic, but comparable tenant sales are exceeding pre-pandemic levels with year-to-date comparable sales up nearly 5% versus the same period in 2021 and up over 13% compared to the same period pre-COVID in 2019. The quarter continues to reflect retailer demand at a level we have not seen since 2015. Some other third quarter highlights include occupancy at quarter-end was 92.1%, which was a 180 basis point improvement from the third quarter of 2021, and a 30 basis point sequential quarterly improvement over the second quarter of 2022. We continue to see strong leasing volumes, which for the year are in excess of 2021 levels. For the quarter, we executed 219 leases for 1.1 million square feet. We saw same-center NOI growth of 2.1% in the third quarter compared to the third quarter of 2021, which was a very strong quarter. FFO came in at $0.46 per share. On Thursday last week, October 27, we declared a $0.17 per share quarterly dividend, which represents a 13.3% increase over the prior dividend. We continue to focus on redevelopment and repositioning of our top-quality regional town centers. We are underway returning the approximate 150,000 square foot, three-level east end of Santa Monica place, formerly occupied by Bloomingdale's and Arclight theater, with an entertainment destination use, high-end fitness club, and co-working space. Estimated project costs range between $35 million to $40 million, at an estimated yield of 22% to 24%. We expect this redevelopment to be completed in 2024. We intend to renovate and re-tenant the Nordstrom wing of Scottsdale Fashion Square with luxury-focused retail and high-end restaurant uses. Estimated project costs range between $40 million to $45 million at the company's share, with an estimated yield of 13% to 15%. We also expect this redevelopment to be completed in 2024. We continue to secure entitlements and/or plan transformative projects to redevelop at Tysons Corner, the former Lord and Taylor parcel, with mixed uses and possibly flagship retail uses. At Flatiron Crossing in Broomfield, Colorado, the multi-phased mixed-use densification expansion for which we secured entitlements late last year. And at Kierland Commons in Phoenix, Arizona, for an expansion to add multifamily and office buildings to this amenity-rich property in the Northeast Phoenix market. We are excited to announce the addition of a 130,000 square foot Target to Danbury Fair Mall; the signing of Target completes the repurposing of yet another Sears box. Primark has already opened in the upper level and Target will open in the lower level in 2023. As we all know, Target picks and chooses its real estate extremely carefully, so the decision to locate at Danbury Fair is a testament to the real estate and to the center's performance and reputation. As Doug will elaborate on shortly, we continue to be very pleased with the strength of the leasing environment. As expected, given the depth and breadth of leasing demand, we've had very robust leasing results so far in 2022. Leasing interest continues to come from a variety of categories and sources, including health and fitness, food beverage and entertainment, sports, grocery, medical, co-working, hotels, and multifamily, at levels that frankly we've never seen before. Bankruptcies continue to be at a record low. We continue to expect to see occupancy gains and NOI growth through the remainder of this year and into next year. Now onto the highlights of the quarterly financial results. This morning, we posted solid operating results for the third quarter again same-center NOI increased 2.1% versus the third quarter of last year, excluding lease termination income. Year-to-date for the first nine months of this year, same-center NOI has increased 10%, both including and excluding lease termination income. FFO per share for the quarter was $0.46. This was one cent better than the third quarter of 2021 at $0.45 per share. Primary factors contributing to this FFO per share increase are as follows. Firstly, a $10 million increase in gains from land sales, which obviously can be lumpy in any given quarter. Secondly, a $5 million increase in straight-line rental income. This was driven by write-offs during the third quarter of 2021 of straight-line rent receivables, as we continue to work through our remaining pandemic-related tenant receivables assessments in 2021 last year. And third, a $3 million improvement in bad debt expense. This was driven by $2 million of bad debt reserves in the third quarter of '21, as we also continue to work through our pandemic-related tenant receivable assessments last year, and then we had a $1 million benefit in the third quarter this year from collections of previously reserved tenant AR. Offsetting these positive factors for the following, firstly an $11 million decline in lease termination income. This was driven by a large lease termination settlement in the third quarter of 2021, which was from a national retailer that closed all of their stores within the United States last year. Lastly, there was an unexpected $4 million relative quarter-over-quarter decrease in valuation adjustments pertaining to our investments in retail funds. This morning, we updated our 2022 guidance for FFO. We narrowed the range and decreased the midpoint of FFO estimates. '22 FFO is now estimated in the range of $1.93 to $1.99 per share. This represents a $0.02 per share decline in our FFO guidance at the midpoint. Most notably, this FFO range now includes an increased expectation for same-center NOI growth in the range of 7% to 7.5%. If this NOI growth is attained in '22, given the 7.3% growth from last year in 2021, it would represent the second consecutive quarter of greater than 7% same-center NOI wide growth, as our core operating business has rebounded extremely well following the pandemic. This guidance improvement is due to better-than-expected top-line revenue, including percentage rents, stronger common area revenue, and better-than-expected bad debt expenses. We also increased our guidance for straight-line rental income, as well as interest expense by equal and offsetting amounts of $2 million. Looking at the reasons behind our revised FFO guidance, which at the $1.96 per share midpoint is a penny ahead of street consensus per Bloomberg of $1.95 a share. Increased same-center NOI, this is roughly $0.035 per share of FFO improvements. This is expected to be offset by two factors: one, the previously mentioned decline in retail and valuation adjustments represented about a $0.025 per share FFO decline. And secondly, the timing of a very large land sale that was expected to close in late '22, which is now expected to close in '23. This delayed land sale at Chandler in 2023 represents a decline of FFO in '22 of roughly $0.03 per share. To emphasize, our '22 outlook for the core operating business continues to be very strong, with strong NOI growth and very healthy operating cash flow of approximately $370 million before payment of dividends. More details of the guidance assumptions are included within our Form 8-K supplemental financial information, specifically Page 16, that was filed earlier this morning. On to the balance sheet. We continue to focus on our remaining 2022 maturities. Year-to-date, we have refinanced or extended $580 million of debt at a weighted average closing rate of just over 5%. We expect to close on two multi-year extensions of our loans on Washington Square and Santa Monica Place during this month. The $500 million Washington Square loan is expected to extend for four years until late 2026, and the $300 million Santa Monica Place loan is expected to extend for three years until late 2025. We expect the weighted average floating rate on these two extensions to be approximately SOFR plus 2.8%. Both loans will have interest rate caps in place, so they will effectively be hedged as fixed-rate loans. Given these transactions are still pending, we are not at liberty to disclose further details at this time. But with those two deals collectively, we will have refinanced or extended nearly $1.4 billion of debt this year. Including undrawn capacity on our line of credit, we have about $424 million available. We have over $615 million of liquidity today. Debt service coverage is at a healthy 2.7 times net debt to forward EBITDA excluding leasing costs at the end of the year was approximately 9 times — I'm sorry, at the end of the quarter. We continue to be well-positioned in today's environment for both the standpoint of available liquidity, as well as generating operating cash flow. With that, Doug, I'll turn it over to you to discuss the leasing and operating environment.

Thanks, Scott. Leasing momentum continued in the third quarter as evidenced by strong metrics and very high volumes. Third quarter sales were flat when compared to the third quarter of 2021, and this was expected given the very strong sales in the third and fourth quarters of 2021. However, year-to-date sales are up almost 5% when compared to the same period last year. Sales per square foot as of September 30, 2022, were $877, representing an all-time high for the company. Trailing 12-month leasing spreads were 6.6% as of September 2022, compared to 2.6% last quarter and negative 2.5% a year ago, and this is the strongest spread result we've had since the third quarter of 2019, pre-pandemic. We are about to finish our 2022 lease expirations with nearly 90% of our expiring square footage committed and the remainder in the Letter of Intent stage. While addressing our 2022 expirations, we've also been working on 2023. Today, we have almost 25% of our 2023 expiring square footage committed, with another 50% in the Letter of Intent stage. In the third quarter we opened almost 250,000 square feet of new stores, bringing our year-to-date store openings to just over 650,000 square feet, which exceeds where we were at this time last year. Notable openings in the third quarter include Sephora at Kings Plaza, SanTan Village, Doc Martens at Broadway Plaza, Garage at Scottsdale Fashion Square, North base at Washington Square, JD Sports at Fresno Fashion and Vintage Fair, and two more stores with Cotton On at Kings Plaza and Queen Center. In the luxury category, we opened Louis Vuitton men and other notable brands at Scottsdale Fashion Square. We opened 15 new stores totaling almost 40,000 square feet of digitally native and emerging brands in the third quarter. Kierland Commons in North Scottsdale remains a hotbed for this category with Allbirds, Avocado, Bad Birdie, Public Rec, and Travis Matthew all opening there in the third quarter. Other notable openings in the space include Madison Reed at Biltmore Fashion Park, Parachute Home at 29th Street, Purple at SanTan Village, and Vinfast in the Village of Corte Madera and Santa Monica Place. As we continue to transform our properties into true town centers, we're committed to bringing non-traditional uses to our campuses, and the third quarter was no exception. We opened the Department of Motor Vehicles at Valley River, Kid City at Green Acres, Chainstore Country Club Plaza, and a veterinary hospital at 29th Street. Turning to the new and renewal leases that we signed in the third quarter, we signed 290 leases for 1.1 million square feet. Year-to-date, we have signed over 700 leases for 2.9 million square feet, which is right about where we were at this time in 2021. It's worth repeating that 2021 was our best leasing year in terms of volume and square footage since 2015. After years in the making, we're extremely pleased to announce the signing of our Mads at Scottsdale Fashion Square as an iconic brand that is arguably the most sought-after luxury retailer in our industry, which will open an 11,000 square foot store joining the likes of Louis Vuitton, Dior, and other renowned brands. This will be our men's first store in Arizona, making Scottsdale Fashion Square the primary luxury destination not only in the Scottsdale market but in the entire state of Arizona. Other notable leases signed in the third quarter include Louis Vuitton at Broadway Plaza, Gucci Men at Scottsdale Fashion Square, Terex and Kendra Scott at Tysons Corner, and several notable brands at Kierland Commons, JD Sports at Country Club Plaza, Lululemon and Lovesac at SanTan Village, and Levi's at Washington Square. In the Danbury Fair Mall located in Danbury, Connecticut, we signed a two-level, 20,000 square foot deal with Barnes and Noble, where they'll relocate from an open-air lifestyle center just down the road. This highlights our belief that it's not about the venue, but rather it’s about the best real estate. With the recent additions of Target, Round 1, and other prominent brands and experiences, it’s clear that Danbury Fair fits as one of the top real estate markets. At Queen Center, we signed leases with two notable international apparel brands totaling almost 100,000 square feet and we look forward to announcing these brands soon. While it's hard to find game-changing tenants for Queen Center, which already does over $1,700 per square foot in sales, we believe this duo to be just that, both in terms of sales and traffic generation. In the third quarter, we signed leases with over 20,000 square feet of digitally native and emerging brands across the portfolio, including Allbirds and Brilliant Earth at Broadway Plaza, Avocado at 29th Street and Washington Square, Madison Reed and Outdoor Voices at Kierland Commons, and others. To reiterate the continued strength of our deal flow, year-to-date we reviewed and approved 45% more deals for 35% more square footage than we did during the same period in 2021. Once approved, these deals move to documentation and are added to our already very strong leasing pipeline. This strong shadow volume bodes extremely well for continued occupancy and revenue growth for the remainder of this year, next year, and even into 2024. In conclusion, our leasing and operating metrics are solid. Sales are outpacing last year, occupancy continues to increase, leasing spreads are now positive in the mid-single digits, the strongest they've been in three years. Leasing volumes are on pace for a second consecutive record-setting year. Although the future remains unknown, and despite the macroeconomic backdrop and the looming potential of a recession, we have seen very little pullback from the retailers, which I think is a result of the healthy retailer environment that exists today, as well as a testament to our best-in-class portfolio of shopping centers. And now I'll turn it over to the operator to open up the call for Q&A.

We will begin with Greg McGinniss from Scotiabank.

Hey, good morning out there. Looking at the development pipeline, hoping you could discuss the changes in the disclosure, including the removal of some of the potential serious redevelopment and your thoughts on mixed-use redevelopment as we are facing higher borrowing costs, higher construction costs, and looming economic risks.

Yeah, good afternoon, Greg. Changes to the development pipeline in terms of Sears, you know, we've really addressed the lion's share of the boxes with the exception of those that we intend to scrape and add mixed-use and more densification. For example, we've completed the returning of the boxes at Vintage Fair at Deptford Mall, and we mentioned the returning of Danbury with Target to accompany Primark. On a smaller scale, we retested the Sears Box at a property in upstate New York mall with a hospital use. We've really addressed most of those; we're still in entitlement and/or pre-leasing for Washington Square in Los Cerritos. Once we have projects to report, we'll certainly report those, likely they will land in our development pipeline. So at this point, it was appropriate to remove those. We have supplemented that now with two very exciting projects. One is effectively the returning of three levels at Santa Monica Place, which is great real estate right across from the light rail station, and we intend to provide a variety of different and diverse uses to attract incremental traffic to that property. We're very excited about these uses, and we are in lease documentation with most of them at very attractive returns as well. In Scottsdale, it's really just an evolution of the luxury expansion that we did two to three years ago. Recall we intensified our luxury and concentrated our luxury in the run-up to that redevelopment. The names are broad and demand continues to be very strong. As a result of that, we are going to continue our luxury leasing effort to through the Nordstrom Wing. Doug just mentioned, in particular, Amaze, which we had announced a couple of months ago. So, again, a very exciting project. Pre-leasing is progressing at a very good level and with very attractive returns. Lastly, you mentioned mixed-use. Generally, the unlevered yields and multifamily, even at the beginning of the year, independent of the increased borrowing costs, which are certainly a factor, but the yields were in the 6% range unlevered yields, which were not even attractive to us. Our land positions are highly coveted within our communities, allowing us to envision deals where we could contribute the land by ground lease or contribute the land into a joint venture and participate in the NOI stream from residential uses and office uses that way. That game plan really hasn't changed and has only been reaffirmed as a result of the increased borrowing costs in today's environment.

Thanks, I appreciate all the color there. Just sticking with the development pipeline, are there any updates, you can provide on some of the fixer stadium, any numbers around that yet or working with the city on entitlements or ability to do what you guys want to do there. And then also on the parcel outlets?

Yeah. On Fashion District, I can't report much more at this point. Our development partner continues to work with the city on entitlements. We continue to secure control of any space that's necessary to accommodate the development of the arena, which again, would be several years down the line in the 2031 timeframe when that would open. So nothing more to report in terms of economics there, but I would anticipate we may be in a position to give you more over the next few quarters. As for Carson, that remains an ongoing legal matter, and I'm just not at liberty to expand on that right now. Greg, thank you.

Alright. Thank you.

We'll now hear from Derek Johnston with Deutsche Bank.

Good morning. Thank you. Can we hear your thoughts on the push and pull between increasing the dividend, especially with the stock where it’s trading now, versus potential other uses, like ramping redevelopment or even deleveraging?

Yeah, sure. Just as a reminder, we used the opportunity during COVID to reset our dividend, along with the robust recovery of the business, which gave us an opportunity to harvest a significant amount of free cash flow. I mentioned that cash flow on an annual basis, after payment of recurring CapEx, but before dividend payments, is approximately $370 million. So fast forward two and a half years later, after we made those dividend decisions, the business is on firm footing; we're very confident about the outlook of the business. We still remain committed, Derek, to maintaining healthy payout ratios. We also remain committed to retaining cash flow to reinvest back in the portfolio and to reduce our debt. At the end of the day, the dividend change that we made was approximately $18 million. We believe it's important to get back into a cadence of increasing our dividend, given the outlook for the business. There are no guarantees for future increases, but we certainly hope to be in a position to revisit that down the line as well. This is a firm vote of our confidence in the business and its outlook right now. We will still remain committed to reducing our leverage and reinvesting back in the portfolio through developments in Scottsdale and Santa Monica, which are great examples of that. Post-dividend change, our payout ratios are very acceptable and low. Leading into that, our payout ratios, by the way, were among the lowest in the industry. So I think there's a good balance between all three aspects, and we’re going to be mindful of that balance.

Okay, great. That makes sense. Secondly, you've had pretty strong lease volumes for a while at this point. Just hoping you can speak to the potential rent coming online over the next year and the cadence of openings, especially after opening 250,000 square feet in Q3. I was wondering what you're anticipating for Q4 and 2023. Thank you.

Yeah, sure, Derek. So falling short of providing you guidance for 2023, I'll say that the leasing pipeline continues to be really strong. For the last few quarters, it has exceeded 3 million square feet, both between signed deals and deals that are in process. The deals are reviewed bi-weekly and continue to be a very strong, high-volume agenda. So in our view, we'll continue to see strong NOI growth and revenue growth coming from that. We do have a new disclosure in our investor deck, which provides the incremental rent impact that we would expect from any new stores coming online. So you can refer back to that, and we'll keep it updated. The view is strong, and Doug, unless you tell me the opposite, I don't think that’s the case.

No, it does. Scott. The question I get asked all the time about the macroeconomic environment is whether retailers are pulling back. The short answer is, they are not. We have a very, very healthy retailer environment right now. Those that were going to fail pre-COVID ended up failing during COVID, leaving us with a watch list that is as low as it's ever been. A lot of retailers out there have very healthy balance sheets; thus, we don't foresee this ending anytime soon.

Sounds good. Thanks, everyone. That’s it for me.

We'll now move to Craig Schmidt with Bank of America.

Thank you. I just wanted to maybe dig into what really drove the higher leasing spread. As you pointed out, it's the strongest it's been in three years. Are you seeing more pricing power, or was it a fortunate quarter that just played out well? I’m looking for an explanation on the 6.6% leasing spread.

Yeah, good question, Craig. We've been talking about it for a few quarters now that with the pick-up in occupancy, we’d start to see things we could push on rate, and that seems to be the case. We reached 92% occupancy, which creates tension between supply and demand. As we review deals again, it seems like we're getting more and more pricing power. In a given quarter, it's challenging to tell. I think at the start of the year, we hoped to achieve a healthy mid-single-digit leasing spread. I think it was something we discussed in previous calls. We're pleased to be sitting here now with this result. Based on all the deals we're reviewing moving forward, I expect this is a level we can continue to sustain. Doug, any commentary on that?

No, I think you're spot on, Scott. We discussed that our main goal coming out of the pandemic was all about occupancy. Now, with our 92% occupancy level, we’re refocusing on rate, which is exactly what we're doing.

It sounds like you have a lot of confidence in the continuation of the leasing spread. Are your expectations for the holiday of '22 to be reasonably positive?

Yeah, I think so. If you look at the National forecasts out there, they call for mid-single-digit type of holiday growth. We certainly won't see the 15% or so growth from last year, but I think it's reasonable to assume based on our conversations with retailers that they feel optimistic about some growth this year; just not as robust as last year.

And Greg, it's Doug. I've read a few surveys, and what excites me is that it really seems like the vast majority of shoppers this holiday season will be shopping brick-and-mortar in addition to online. The delays in shipping that were abundant last year frustrated many consumers. Shipping costs are also getting expensive, making brick-and-mortar a favorable option this holiday.

Thanks for the color.

Thank you, Craig.

Our next question will come from Samir Khanal with Evercore.

Hey, Scott, good morning. I know you guys are not providing guidance for next year, but just generally, how are you thinking about potential tenant fallout post-holidays, normally when we see that is when a year has been essentially nil. Clearly, there's positive momentum on the leasing side, but I am trying to figure out if there are any headwinds we should think about for next year.

Yeah, it's hard to predict that we'll have the same type of nil year in 2023 that we've experienced in 2022. But ordinarily, right now, we'd start to hear from retailers that were setting themselves up for major renegotiations or restructures. However, that's really just not the case. I think 2023 will likely be an unusually low year; I don't think it will be a nil year, but there might be one or two here or there that may file, but nothing is on our radar screen at this time. Our renewal conversations with retailers remain very strong; they are coming in requesting to shed stores, generally they have right-sized their fleets in the U.S. and are in expansion mode for the most part. So, I believe the backdrop is set for continued occupancy growth.

And I guess, Doug, just shifting over to you regarding the negotiations you've discussed. You mentioned that retailers are not pulling back and they're continuing to open up stores. If you step back, what are they pushing back on? Is it primarily higher TIs or CapEx? What's the pushback you're getting?

Hey, Samir. The pushback, like always, whether it’s now or pre-pandemic, is always a function of rate. Rate is in negotiation, I would say that tenant allowances are consistent; they haven't changed much over the last several years. So I would say the battle is always around rate. Thankfully, given the quality of our portfolio, we're able to get what we need to get.

Okay, got it. And then one more, Scott, if I can on the guidance range. I know you discussed potential land gains coming in, but shifting over to '23. In terms of modeling, should we start to consider land sales as a recurring item? If so, what magnitude should we factor annually?

Yeah, Samir most of the land sales are concentrated in our Arizona portfolio. These were land holdings that we've had on the balance sheet for 15 to 20 years. At one point in time, we envisioned expanding that market with further regional town centers, and that is no longer the case. We will continue to sell through that inventory into next year. We'll provide you more clarity on the 2023 inaugural call when we give guidance. By the end of 2023, a good majority of it will be exhausted, but there will always be small elements of it with past sales here and there. So we'll give you more clarity in three months.

Got it. Thank you.

We'll now move to Floris Van Dijkum with Compass Point.

Thanks, guys for taking my question. It sounds like the underlying business seems to be doing pretty well. You've got 9% same-store NOI growth year-to-date, record tenant sales, positive leasing spreads, your S&L pipeline is fairly robust, at approximately $33 million expected in incremental revenue for next year. When do you think you can get back to '19 levels of NOI? You are not providing guidance for next year, but how comfortable are you that you’ll get there? Any color on that would be great.

Sure, Floris. We are very comfortable that we are on track to get there. The question is when. Again, the pipeline is very strong. We believe that by the end of next year, we will be there on a lease occupancy basis. Obviously, there are some delays in start times for new stores. Without giving you guidance for '23, I think on a run-rate basis we will be there in terms of occupancy by the end of next year.

The other question I had for you is in terms of your OCR, which is relatively low at 10.8%. You're starting to see your ability to push rates through. Can you talk us through the dynamics of that and how tenants are looking at rents relative to occupancy costs, and their ability to pay more rent going forward?

Yeah, you're spot on. Our ability to push rates, as indicated by spreads, is negatively correlated with the cost of occupancy. At 10.8%, less than 11%, that’s about 100 basis points below where we were at the end of 2019. If I could go back in time, it's perhaps the lowest we've seen in four or five years. That's a leading indicator of our ability to likely push rents, given the profitability of our portfolio. Doug, do you want to add?

Yes, I would say the cost of occupancy is becoming less relevant. The stores in our town centers do more than just sell merchandise; they facilitate online purchases through store pickups and shipping from the store. While cost of occupancy remains important, we focus more on the value of our real estate to price our properties rather than strictly off the cost of occupancy.

Bear in mind, Floris, competition for our better real estate also allows you to push rates. We’re seeing situations where there’s competition as we leave space.

Thanks. Last question for me. In terms of specialty leasing, it's challenging for investors to figure out as it doesn't show up in leasing spreads, and there are other things. How is that progressing? What are you seeing for key offs and billboards and other ancillary revenue? And how much more ability do you have to increase that as the economy improves?

Great question. I can confirm that segment of our business will indeed bounce back to pre-COVID levels this year. Local merchants and advertising contracts for ancillary revenue, parking revenues, etc., have rebounded from a lower point. If you look at our occupancy, we're still above 7% in terms of our temporary tenancies. There's always a push and pull between Doug and his counterpart in that temporary tenant specialty leasing world. Anytime we can convert those deals to permanent uses, you're talking about a pickup in rent that’s probably 2 to 2.5 times what the temporary tenant was paying. That should be a big component of our growth going forward - converting temporary occupancy to permanent. The good news is the local merchants we've worked with extensively throughout the pandemic have recovered quite well, though we've shed some; the demand has remained strong. We're looking forward to converting that to permanent occupancy.

Thanks. That’s all for me.

Our next question comes from Linda Tsai with Jefferies.

Hi, recovery of bad debt has been a tailwind in '22. Netting that with a view that tenant fallout is likely low in '23. Is the bad debt line item a headwind or still a potential tailwind to earnings in '23?

Hey, Linda, I'd say it's probably relatively neutral. GAAP requires you to reserve all receivables once retailers show significant weakness in fulfilling their lease obligations. We have benefitted from collections this year, but we expect that to be less impactful in 2023. It will likely remain relatively neutral; it's not a major factor. We do not anticipate a significant bad debt line item at this time for next year.

Got it. And on Irma's opening in Scottsdale, how are luxury retailers considering their U.S. store growth plans over the next two to three years?

Hey, Linda, it's Doug. Luxury is a very strong category right now in the United States. Luxury tenants are very active; they are looking hard at Scottsdale and as Scott mentioned, we completed our remix of the Neiman Marcus Wing, and we're now moving to the Nordstrom wing. We probably have more demand right now in the luxury sector than we have space. So we see it as very aggressive. Keep in mind that we don’t have a lot of luxury retailers outside of Scottsdale Fashion Square, the Fashion Outlets of Chicago, and a lesser extent, Santa Monica Place.

Thank you.

We'll now move to Connor Mitchell with Piper Sandler.

Hi, thanks for taking my question. I just have a couple. First, in Alexander's earnings release, they reported that IKEA that was recently opened in Rego Park is now leaving. Do you guys see any tenants potentially closing early at urban locations? Do you think this is a one-off or could a similar situation happen elsewhere?

No, I don't think so. There's always going to be situations where a store underperforms and they leave. But I don't think that's an indictment necessarily on large format urban locations, though.

No, I would consider Kings Plaza in Brooklyn and urban locations like Queens Plaza in Queens, and we’ve seen little to no fallout in either of those centers. I think that's indicative of the urban world within our portfolio.

The good news is that in some of those locations, the opportunity to backfill is quite significant. Doug, you alluded to Queen Center; that’s roughly 100,000 square feet with two very prominent apparel retailers that we're not at liberty to disclose right now. This opportunity to backfill can provide incrementally attractive resources from sales and traffic generation.

Okay, appreciate that. Regarding One Westside, now that it’s open and Google’s moved in, do you see yourself harvesting non-core assets and selling your position? How do you view the market through your stake in the ability to transact these types of assets?

Well, One Westside is certainly unique. It's a single-tenant, Google credit. You can see what the cap rates are for that, and they are very attractive. There are mechanisms in that joint venture agreement, which I can't divulge, that do allow for a transaction to occur. In the meantime, we're going to enjoy the diversity of NOI from Google, which is obviously a fantastic credit. We are celebrating the conversion of a regional mall project that is no longer a retail project; it's now Google Campus, some 600,000 square feet. It's very noteworthy. We will hold on to that NOI, and at the appropriate time, we’ll consider a transaction.

Okay, and just one last quick one. Regarding Washington Square and Santa Monica Place, are you expecting any expensive or heavy principal pay downs for the extension? Can you speak on that?

Yeah, I can't get into the details; those are transactions that are pending. It would be inappropriate for me to elaborate. What I can say is that we have successfully secured extensions and refinancings for the last couple of years with very little capital to pay down; I’m not sure that will be different from what we’re doing with Washington Square and Santa Monica Place, but I can’t disclose specifics at this time. We will report once those transactions are closed, which should be in the next few weeks.

Yeah, understood. Okay, that’s all from me. Thank you.

Thank you.

We'll now hear from Mike Mueller with JPMorgan.

Yeah. Hi, just a quick one here. What are some of the dynamics driving the Santa Monica box redevelopment returns? They seem to be close to two times higher than the box redevelopment at Scottsdale Fashion?

Well, it's extremely attractive real estate for starters. It's positioned across from a light rail that, prior to COVID, delivered 7,000 commuters per day to the doorstep of that three-level configuration. There's a tremendous opportunity for utilization here. Santa Monica is a heavy tourist community. International tourism has subsided during COVID, but we see that starting to tick up, while domestic tourism seems to have almost fully replaced it. The daytime population is improving here in Santa Monica incrementally. If you examine our project in Santa Monica compared to Third Street, just north of it, we’re maintaining some unique approaches to our project that differ from other developments. We are excited about the uses ranging from entertainment to fitness and co-working, and those two, by the way, of course, interplay with each other perfectly, very synergistic. Lastly, we are very excited about the destination entertainment use. We will provide you more details once we can, once those leases are fully negotiated. The fundamentals of this real estate drive these high returns.

Scott alluded to this earlier: competition for space. This is a perfect example of where we had more interest than we had available space. While our goal is to come up with the perfect mix for the property to generate foot traffic to Santa Monica Place, we had the luxury of shaping that with more interest than space.

Got it? Okay. Thank you.

We will now take a question from Truist.

Thank you. Good morning. Just a couple of quick questions on the balance sheet. I noticed in your debt disclosure, you talked about the Washington Square Mall and Santa Monica being potentially refinanced this month. Looking at the SOFR and the spread, Washington Square Mall at a 4% spread, Santa Monica at 1.5%. Just curious, I know you don't want to go into too much detail, but those are two high-quality malls at differing spreads. If I recall correctly, Washington Square was per dollar sales in a mall. Curiously, if that's somewhat indicative of what we can expect on a pricing perspective for some of your other future refinancing. Thank you.

Yeah, good afternoon. I can’t comment much further at all on Washington Square and Santa Monica and the unique differences between each. In the debt markets, some lenders do view these transactions as effectively new money going out, so they price it according to where they view things are at the moment. I can’t get into the dynamics of each, though.

Okay, just one question on the Santa Monica loan. Is that price at all benefiting from an option-type agreement that you previously had?

The maturity on the Santa Monica loan is December of 2022.

Okay, and just last question, Scott. Was there any benefit from the conversion of cash-based tenancy to growth this quarter?

Very little; you can see a bit of it in our bad debts, which were marginally positive, less than a million bucks. There's not a significant impact.

Okay, thank you, guys.

Thank you.

And we'll now hear from Craig Mailman with Citi.

Alright, I'm curious about the 2023 debt maturity schedule. Any updates on where we are at with Green Acres and Scottsdale? How is that process going?

Yeah, we are in the market. Those are two very unique assets. Green Acres is one of our few billion-dollar campuses, which generates $1 billion of annual sales revenue. So it’s a bit unique in terms of its makeup and flavor, while Scottsdale Fashion Square is a top 10 asset in the United States. We have a huge redevelopment under its belt and luxury momentum, with more to come. These two unique assets are currently in the market, and we'll report over the next few months on our progress on those.

Do you think those will be extensions similar to recent deals, or would lenders be open to refinancing that?

Yeah, again, we are in the market now, which I think means they will be attractive refinancing candidates because of the unique nature of them. We will have other refinance candidates as 2023 rolls on.

Okay, and just one quick question on the landfill gains that got delayed. Is that under contract, and did the timing get pushed out? Or is that more of a prospective placeholder in '22 guidance that you are now pushing out in the transaction market?

It's a specific deal under contract. Those deals sometimes take time to develop, including getting entitlements in place. It’s simply a matter of timing.

Okay, great. Thank you.

And we'll now hear from Haendel St. Just with Mizuho.

Hi, I’m Haendel and on behalf of my colleague. I hope you are doing well. I had a follow-up on leasing spreads. Does the denominator include a large portion of COVID-adjusted leases with lower base rents in exchange for lower breakpoints on percentage rents? For your leases signed now and going forward, have you reverted back to a traditional lease structure?

Yeah, the population does reflect everything that expired in the last 12 months in comparison to everything that has been signed in the last 12 months. It’s very likely that some of those pre-COVID deals are reflected in that number, and that will continue to be the case. We've been saying for some time that as we continue to convert those deals—which initially had a lower fixed rent element for a heavier variable element—we will see a stronger rent structure with fixed rents and annual increases. Therefore, there’s a bit of that in the spreads. We are indeed leasing on a normal basis right now with fixed minimum rent, annual increases net in place; these are triple net deals.

Got it. Thanks for the color. Just one more here. You had strong sales in the quarter, sales per foot? How much do you attribute this to higher foot traffic? How has foot traffic trended year-over-year? Would you say that foot traffic is driving strong sales, or is it inflation?

Yes. Foot traffic has remained consistent this year, varying between 95% and 100%. It's been steady in relation to pre-COVID levels. Our tenant performance overall has been positive, with luxury being a strong-performing category. The sales environment has generally improved across our categories. I’d say footwear is the only category slightly negative; everything else is trending positively. Therefore, it is truly a combination of factors driving sales, with inflation playing a role as well.

Got it. Thanks for the color, guys.

Thank you.

And we have a question from Ronald Kamden with Morgan Stanley.

Hey, just a quick one, and sorry if you addressed this already. You previously commented on leasing activities coming in slightly ahead of the 2021 levels and potentially recovering to pre-COVID occupancy by late '23. Just curious, with the current activity, does that still hold? Is it better, or worse than you expected?

Yes, that still holds, based on the deal flow we are experiencing today. Doug provided commentary that we are not hearing from retailers intending to slow or halt new store expansions, which continues to support our stance on occupancy growth and NOI growth into next year and beyond.

So I want to underscore that we have a very healthy retail environment out there. I talk to retailers regularly and we’re not seeing the fallout you might expect given the economic situation.

To emphasize, bricks and mortar retail is in a great position, and that’s a theme we’ve heard from our sector over the last few days.

Great. And lastly, regarding financing, you are working through some multi-year extensions. Any idea where rates are indicated or how they look to shake out in terms of debt costs on those deals?

I would say, Ron, on balance, for secured financing, you’re looking at low to mid-sixes. Some transactions may be better, while others may be worse. It’s challenging to figure out an average rate at this time; it’s probably more toward the low end of the sixes.

Great, thanks so much.

Thank you.

And ladies and gentlemen, that’s all the time we have for questions today. I’ll turn the call back over to Scott for closing remarks.

Thank you, everyone, for joining us. We continue to enjoy strong operating results during the year, along with strong demand from our tenant community. We look forward to seeing many of you in person or virtually during our upcoming investor day, which is in Scottsdale from November 29 to November 30. Thank you for joining us today.

And with that, ladies and gentlemen, this concludes your conference for today. Thank you for your participation, and you may now disconnect.