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.

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 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. And with that, I would like to turn the call over to Tom.

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 three 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 $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 are 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-in-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 Nordstrom 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 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.

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 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 three 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 three-year extension of our $300 million CMBS loan on Santa Monica Place. The extended loan carries a very attractive floating rate of LIBOR plus 1.48%, which will convert to SOFR probably in the next two to three 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 five-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 five-year loan is expected to be a fixed rate that will have a loan balance of $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.

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 compare 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-month leasing spreads remained positive at 4% as of December 31, 2022. 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 included 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 three stores with JD Sports at Country Club Plaza, Scottsdale Fashion Square, and Victor Valley. In the luxury corridor, 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 Café 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 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 '25. 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. 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 compare 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 the first quarter of 2021. 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 three for all of 2022. Bankruptcies overall are at their lowest level since 2015, which is consistent with our significantly reduced tenant watch list. Leasing volumes were at record levels 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. 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. 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.

Our first question comes from Derek Johnston with Deutsche Bank.

Thanks for the puts and takes in guidance, Scott. I was wondering, what bad debt assumptions did you forecast in guidance given the macro backdrop? And any background assumptions on retention ratios or insights or further insights into the $10 million in lease termination income would be helpful.

Thanks, Derek. Bad debts, we expect to be very normal, not significant at all. And that's consistent with what we're seeing. Again, Doug mentioned our tenant watch list is very low, incidents of bankruptcies are low. So we don't expect a significant amount of bad debts. And that's kind of consistent also with the level of lease termination income dropping so significantly from $25 million last year down to an estimated $10 million this year. There's just - there's a lot less volatility. Those numbers obviously escalate during times of volatility. So we expect that environment to be much more normal.

And then the retention ratio to the last part of that question?

Yes. Thanks, Derek, for the memory jog. We have, for the last several months, last several quarters, frankly, experienced very strong retention rates. At times when we're remerchandising space, we're certainly choosing to take that offline and upgrade the merchandising mix, which results in some downtime. But generally, we're seeing very strong retention rates as we talk to retailers about renewing their fleet.

Okay. And then let's shift to leasing, right? I mean so clearly, the way it looks right now, according to you, the deal pipeline is shaping up pretty strongly. But are you seeing any shifts given the macro uncertainty? I mean clearly, '21 and '22 were solid leasing years. But I guess the question is, are retailers still pushing through with expansion projects in your view? How are leasing and rent negotiations progressing or changing early in '23? And I guess, lastly, like you've been through downturns before. Are you seeing any leading slowdown indicators at this point? Any further leasing info certainly is valuable.

Derek, I'll start and then I'll pass it off to Doug. We're seeing actually quite a bit of interest with, I would say, an even heightened sense of urgency to get deals documented and done. You saw, we just announced a big one in Santa Monica Place, and there are two or three that are going to follow that are not subject to mentioning the retailer's name yet, but you'll be seeing announcements within the next few weeks. So if anything, we're seeing a heightened sense of urgency to get deals done and documented, and not a lot of pressure on rate, at least on the bigger, higher-profile deals. Doug, you might care to speak more about the in-line spaces.

Yes, Derek, I mean it's early days in 2023. But I can tell you, and I mentioned this in my remarks, that, to date, we've really seen no retailer pull back. Retailers are honoring the leases they signed. They're opening the leases they signed. And they continue to negotiate the leases that are out. And I think if you think about it, we have a very, very healthy retailer community out there, environment. And so many of the retailers that were suffering pre-pandemic failed during the pandemic. So we're left with a lot of big public companies that are long term in nature and are really being opportunistic when it comes to best-in-class real estate, which we have.

Our next question comes from the line of Greg McGinniss with Scotiabank.

I apologize. I was on mute. Rookie mistake. I apologize if I missed any opening remarks, but what's the land sales expectation built into 2023?

Greg, in 2022, we had about $0.09 of FFO from land sales, net of taxes. We still have a pipeline that we're executing on numerous transactions that are under contract. If we're looking at 2023, I would say that will land somewhere between 40% to 50% or so of '22 levels.

Okay. Great. Back to that leasing on that, you've got a pretty sizable pipeline that's expected to open up over the next few years here. I believe you said 2.5 million square feet, if I'm not mistaken. What's the net increase in NOI that's expected to benefit from that? And is that occupancy already reflected in that 92.9% just to check?

Greg, the occupancy does reflect that pipeline. So it's included in the 92.6%. The pipeline of square footage is 2 million square feet, although Doug is rapidly trying to add to that. And it's a top priority for us to get that space signed. We've got to get it open because really the high fives come when the tenants start paying rent. And I think Scott or Doug may have mentioned that $62 million of incremental revenue top line. That may not all hit NOI because obviously, we're in inflationary times, and we're fighting some rising operating costs, but the vast majority of it will. So I'd estimate we can see north of $55 million of NOI pickup as a result of getting those pipeline deals open and paying rent.

Okay. So that was a net number. Thank you.

Our next question comes from the line of Craig Schmidt with Bank of America.

One, I was just wondering, are you still getting signs from the consumer that they want more restaurants at your property? And how has the success rate been of the restaurants that you have opened in the last couple of years?

Yes, restaurants, food and beverage, and fast casual continue to be a major focus for us. In fact, food and beverage and restaurants were our top performers in sales in 2022. There is significant demand, and we are observing a shift in sales from traditional apparel and retail towards services, including travel and restaurants. So to answer your question, yes, we are seeing this trend and the demand is strong.

Great. And then maybe you can tell me a little bit about Arte Museum at Santa Monica Place? The visitors seemed very impressed, but what exactly would you be seeing at the museum?

Well, it changes constantly, Craig. They control the content. It's immersive video. So you walk in and you feel like you're part of it, a wave crashing over you, for example. And you can go to their website. They're open in Korea. I think they've got one other U.S. location, maybe in Las Vegas. But they certainly generate a lot of interest, a lot of traffic, a lot of visits. We think it's going to be very beneficial for the third level of Santa Monica Place, and we're hoping the concept can travel a little bit through the rest of our portfolio. But it's exciting. There's nothing really like it around, and it's going to be a tremendous addition.

Our next question comes from the line of Samir Khanal with Evercore ISI.

Scott or Tom, how are you thinking about variable rent or percentage rent this year with the conversion to fixed rent? And I guess on that point, is there any sort of potential upside from sort of international tourism coming back, whether it's from China or other areas?

Yes, we anticipate that the percentage of rents will continue to decrease as we renew leases and shift those variable rents to fixed rents. This is a dedicated effort on our part. We experienced some of this transition in 2022, and I believe it will accelerate in 2023. For context, we have budgeted our sales to be flat in 2023. We'll see how the rest of the year develops in that aspect, but we will definitely observe a continued conversion of variable rents to fixed rents. And, Samir, I'm sorry, what was your second question?

No. With international tourism returning, particularly from China and other regions, do you believe there could be an increase in that number? Are you accounting for any potential upside in percentage rents from the resurgence of international tourism?

No, we're not getting that specific. But if you think about it, you think about the revenge spending that occurred domestically here in 2021. As the Asian consumer gets back out into the world, we'll certainly see some benefit, obviously, some benefit in markets like Santa Monica, in Chicago, and Tysons Corner. So we're not building that into the guidance, but there's certainly room to think that as those consumers start to venture into the United States that we'll see some of that international tourism that's been missing for the last few years start to return.

And any color you can provide on sort of what your assumptions are for occupancy for '23? How much of an occupancy pick up will we see, you think?

We're going to continue to push that. Obviously, the higher the occupancy gets, the tougher it is to get there. But we were about 94% pre-COVID, dropped as low as 88%. And we've leased our way back to 92.6%. Our expectation is to be somewhere between 93.5% and 94% by the end of next year.

Our next question comes from the line of Floris Van Dijkum with Compass Point.

I have a question. When do you anticipate recovering to 2019 levels of NOI in your portfolio? Your portfolio has changed somewhat over the past few years due to additional asset sales. It would be helpful for the market to understand your reference point and how quickly you believe you can achieve that. Clearly, your guidance reflects a slowdown in your NOI growth from the over 7% levels achieved in the last two years. Could you provide some comments on this when you have a moment?

Yes. Well, the same-center growth, I mean that's coming against some very tough comps. 7% growth for 2 years in a row, that's extraordinary. So that's a little bit out of the norm, and this year, we're getting back to a more normal level. But in terms of when we get back to pre-COVID NOI levels, we've said for some time, we believe it's going to be around the fourth quarter of '23 and going forward from there. And it will track, to some extent, with the occupancy level as we get closer to that 94%, which we're pushing for this year. So we think we'll be there in the fourth quarter, and that's not inconsistent with what we've said in the past few quarters. Things are moving along nicely. And if Doug keeps doing a great job with his team on the leasing front, we'll get there later this year.

Could you provide some insight into your recovery ratios? One factor that may impact your earnings and NOI growth this year is the increase in expenses, which might exceed the fixed CAM increases. This could affect your NOI growth, even as you benefit from occupancy gains and hopefully positive lease spreads. Could you elaborate on the current situation with new leases? Are you asking for and receiving higher fixed CAM? What other initiatives are you implementing to enhance your recovery ratios? Additionally, transitioning from turnover-based rents to permanent tenancies should ideally improve your recovery ratios and margins moving forward.

Yes, Floris. We've been operating as a fixed CAM shop for many years. Most of our leases are based on a fixed CAM structure with annual increases ranging from 4% to 5%. The inflation in 2022 and 2023 has led to a significant rise in our shopping center expenses, which may have exceeded the usual annual increases we see with fixed CAM. However, over the years leading up to the current hyperinflationary conditions, our annual increases have consistently outpaced inflation. Therefore, we have a solid buffer to manage the rising operating expenses related to labor, real estate taxes, and insurance. We continue to see these fixed increases in our agreements, with very few exceptions. Additionally, we expect our recovery rates to improve as we convert temporary space, currently about 7.5% of our occupancy, into permanent space, which will further enhance our recovery rates.

Our next question comes from the line of Alexander Goldfarb with Piper Sandler.

I have two questions. First, Tom, regarding sales, we understand that there can be a mix. However, in the fourth quarter, sales were lower compared to the third quarter. Is this due to the mix? Is it inflation? I recognize that tenants are strong and leasing, which we fully grasp. But at the sales level, are customers reducing their spending? Or is it simply a matter of the types of merchandise they were purchasing? I expected that in the fourth quarter, people would spend more for the holidays and perhaps cut back once they receive their credit card bills in the first quarter.

Yes, Alex, the comparison was versus the fourth quarter of '21. And sales in the fourth quarter of '22 were flat with the first quarter of '21. But '21 was a very strong quarter, fourth quarter of '21. And so that's not necessarily bad news or an indication that consumers pulling back. I think it's just we were going against a tough comp. A lot of the retailers blame weather issues. I'm not going to go there. But we weren't uncomfortable with that result. We were up 3% for the year. In terms of traffic and activity, the consumer is still there and proving to be very resilient. So we weren't necessarily concerned about what happened with sales and traffic in the fourth quarter. It was just going against a very tough fourth quarter of '21.

I was comparing the third quarter trailing 12 months to the fourth quarter's trailing 12 months, but I suspect your answer would be similar. My second question is regarding the occupancy build. You clearly achieved a significant amount of lease term in 2021 and 2022 and recaptured a lot of space. However, your overall occupancy is still slightly behind that of your public peers, although they have a different portfolio mix with outlets and malls. It seems like there should still be potential for improvements in occupancy, which could lead to better NOI growth. Are there other factors at play? Is the delay in getting tenants into the spaces the main challenge? I'm curious because it appears that there is still room for growth in occupancy.

You're right about that. I mean we announced the deals, the day we sign them, they go into occupancy. But in some cases, if you look at something like a Pinstripes or a Lifetime Fitness, it's going to take close to a year to get it built out, and it doesn't start hitting NOI until the build-out. So a lot of the stuff that we're talking about today, like Arte Museum, we're going to get the benefit of that in '24 and '25 as it relates to NOI growth, but not in '23. So that big pipeline does bode well for the NOI growth as we look forward into '24 and '25.

Our next question comes from the line of Linda Tsai with Jefferies.

Sorry if I missed it, but did you outline bad debt expectations for '23?

Yes. We spoke about that just briefly, Linda. We do not expect those to be significant at all. As a result, we just did not disclose the guidance. It wasn't trying to be opaque or anything, but we just do not expect that to be significant. It's a very, very small line item when you're looking at a company that generates nearly $800 million of NOI.

And then what's demand like right now from digitally native retailers? That's something that you've talked a lot about in the past. Is that still kind of going on at the same level of velocity as you've seen in prior quarters?

Linda, it's Doug. I would say that the digitally native, the ones the retailers that are currently online that are starting to open bricks-and-mortar stores, that slowed compared to the last 2, 3, 4 years. But then you think about the brands that were born online that turned into bricks-and-mortar retailers, think about Warby Parker and think about Vuori and Allbirds. They were all born online, but now they're just basically traditional retailers. They have as much business in their bricks-and-mortar as they do online. So the new ones are slowing, but the ones that are emerging are really picking up.

Just one last one. Are the luxury retailers turning their store opening plans back to Asia given the reopening? Or what are you seeing as it relates to domestic demand from the luxury retailers?

Where that's most relevant for us, Linda, is at Scottsdale Fashion Square. We had such great success to the luxury wing and the food and beverage that we added a couple of years ago that we're converting the Nordstrom wing to luxury brands. And the demand has been very, very strong. So not a big sample size to speak to your question, but where we are looking to put in luxury brands, we're having pretty strong demand. I don't see it pulling back at all. Do you, Doug?

No, not at all. It's only going to get better.

Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets.

Just a question about the same-store NOI growth forecast of 2% to 3%. As occupancy is expected to increase, which you indicated, and it appears rent growth is holding steady here, obviously, a lot of other factors, including the expenses and recovery income that you discussed, but can you just provide a little bit more detail around that build up to the 2% to 3%? And sort of, I guess, my question is, what's kind of holding it back a little bit? You talked about the $62 million of incremental rent or I suppose, $55 million of NOI that is expected to come online. That's pretty significant growth off your current base. So I'm just curious if you could talk about that a little bit and a little bit more detail around the 2% to 3%.

Sure, Todd. This is Scott. The biggest factor, I think we touched on it earlier, is downtime. As you take large space off the market, most of which is committed, some of which is not, you've got downtime, which impacts you. And as we took a step back as we were doing all of our detailed work, looking at our business plan for 2023, we realized that coincidentally or not, some of our better space and some of our higher rent-generating space in our New York assets were, in fact, spaces that where we're taking offline. So that downtime certainly cuts against growth. You touched on the other component, obviously.

It temporarily hinders growth. We discussed the $55 million of additional pipeline, but not all of it will materialize in 2023. A significant portion will come in 2024, with some possibly extending into 2025. As Scott mentioned, taking space offline results in a temporary decrease in NOI, which will be recovered once we fill those spaces with new tenants.

And Todd, just refer to the disclosures we have on our pipeline. Those will actually get a little bit better than the one we had over Investor Day because of the improved leasing demand that we continue to see. But you can take a look and see what the incremental pipeline is by year.

Okay. That's helpful. And how much of the $62 million or that leasing pipeline, how much of that is in the same store?

The vast majority of it is same-store. We don't have a lot of ongoing development projects that are significant where we pull anything out north of 95%.

Okay. And just last question. On the occupancy specifically, you're looking to sort of be in that 93.5% to 94% range by the end of the year. Just in terms of seasonality, you talked about sort of low levels of bankruptcy. And last year was obviously very muted in terms of what occupancy was lost after the holidays. Do you have visibility on what that sort of seasonal occupancy decline might look like early this year, whether that will be similar to '22 or more of a historical sort of average if we think about that occupancy trend throughout the year?

Yes. We expect to see physical occupancy increase by the end of the year. At the end of 2022, the difference between physical and leased occupancy was nearly 3%, which is quite high for us. As we continue to develop our pipeline and open new stores that begin paying rent, we anticipate that gap will begin to close. Therefore, I believe physical occupancy will significantly improve in the latter half of the year, which will provide a favorable environment for cash flow and NOI growth in 2024.

What about seasonally moving from 4Q '22 into early '23, right, 4Q to 1Q, sort of 1Q to 2Q, are you expecting any seasonal occupancy loss? Or do you expect this to be another year where there's just very little muted sort of levels of occupancy loss early in the year?

You'll always see a drop after the fourth quarter. January is typically when leases roll, you've obviously got the temporary tenancies, which are seasonal in nature, and those guys may roll off. So you'll always see a little bit of a tick down from the fourth quarter to the first quarter. It could perhaps be a little bit less. We'll see how that pans out. But that's just traditional with our business.

Yes. Historically, if you go back over the last 15 or 20 years, it's been a range of 20 basis points to 60 basis points decline between the fourth quarter and end of the first quarter. And I would expect that it would be very similar this year.

Yes. If I recall, Tom, last year, it was about 40 to 50.

Our next question comes from the line of Mike Mueller with JP Morgan.

Scott, what is the actual retailer valuation income assumption in the '23 forecast? I think you said it was about $0.05 higher year-over-year, but what's the number?

It's about $0.01 in aggregate, very small. Very hard to predict also where these market valuations are going to be, but it's nominal in 2023 to be conservative.

Got it. Okay. And then on some of the densification opportunities that you talked about, can you just run through some rough timelines?

The projects I mentioned related to multifamily will take some time to finalize the entitlements and progress. Most of these will be impactful in 2024 and 2025. Regarding retail projects like Scheels Sporting Goods and Arte Museum, we expect them to open late in 2023 or into 2024. Overall, we anticipate spending around $150 million in 2023. I expect these entitlements to become active in 2024. Biltmore may take a bit longer as we finalize its entitlement, which will likely lead to a 2024 or 2025 opening.

Our next question comes from the line of Ki Bin Kim with Truist.

Can you just talk about the trends in operating costs that we should expect in '23? And as these costs go up and as you pose higher lease spreads, I'm curious how much of those higher lease spreads actually can translate into the bottom line versus maybe anticipated into a higher cost?

Yes, our operating expenses will continue to tick up. Ki Bin, we expect about a 3% to 4% growth in shopping center expenses. It's a range of outcomes, from labor costs to property taxes, big line item, insurance, big line items. So we'll see that. Leasing spreads are kind of independent, right? You manage your expenses on a fixed CAM world. And the spreads, your ability to generate pricing power is really driven by growth in occupancy and creating that tension between supply and demand. We think we're there. We've started to see spreads over the last couple of quarters in the mid-single-digit range. I think it's reasonable to assume we'll continue at that level. Doug, do you disagree?

Yes. No, I agree. And the one thing I would add, Scott, is for the first time, probably since pre-pandemic, we're starting to see competition for space again, especially in our better centers. And that's just, by definition, going to drive rate up. So you combine competition with increased occupancy, we're starting to see it in terms of driving rate.

And when you negotiate with tenants, how often is the topic of crime and safety being elevated when you discuss leasing with tenants? And can you talk about some of the things that you've done as a landlord, maybe in conjunction with the study to make a safer kind of shopping environment?

Yes, I'll take the second half of that. We work with all of our cities pretty closely. Santa Monica, for example, we spent a lot of time with the various people in the city as well as the police chief to try to make sure that we make Santa Monica Place the safest environment possible for shoppers. We have a lot of urban properties. And as a result, we're very sensitive to those issues. I think one area that we don't scrimp on as it relates to expenses is security. And we use one of the biggest firms in the country, if not the world, to handle our security, and it's something that we're in close communication with every single municipality we do business in to be aware of issues that are happening. And that's really all you can do. Doug, you can speak to the retailer side of it and how they're reacting or what kind of feedback you get.

Yes. So we don't really negotiate security when we're negotiating leases. But what I can tell you is this is happening a lot. We're having the retailers' security departments reach out to us to partner with our security department and vice versa. So there's meetings, there's functions, there's conventions, if you will, that marry up our security and the retailer security. So we're starting to see a pretty dynamic partnership there. But it's not really a function of the lease.

Our next question comes from the line of Craig Mailman with Citi.

I have a question regarding the delivery times on leases. Are the lead times improving? Is there any conservatism in your guidance about timing for the items expected at the end of '23 or early '24? Could there be a possibility of those items being delivered sooner?

Yes, Craig, Tom touched on it, probably the most sensitive are the larger spaces that generate a significant amount of rent. And just as a practical matter, those take a fair amount of time to get permitted, built out, and ultimately start paying rent. We look at this space by space, and we coordinate with the tenant's construction department to determine what those estimated rent start dates are. So I'm not sure that we're necessarily being conservative. We're trying to be as realistic as possible because, again, we've got a fair amount of the space that came back to us during the pandemic. It's exciting space. We really want to get it open as soon as possible. But each circumstance is different. Each municipality you're dealing with is different. So it's very space-by-space specific. And I think we've got a pretty realistic perspective when we think that rent is going to start to come online.

Are labor issues still a bottleneck for your tenants in terms of opening new stores? Getting employees, is that still an issue? Or is that easing up on the margin?

I think it is easing up. We're in constant communication with retailers, and that was a significant issue over the past 12 to 24 months, but it has really calmed down.

Okay. And then just one last one on.

That and the supply chain issues that were often discussed in the last 24 months.

Great. And just on the financing side, you guys had mentioned Scottsdale. The new loan there is progressing. Are you guys looking at the same type of costs that you were at the Investor Day? Is there anything positive or negative on that front to report? Yes, Craig. During Investor Day, the market was quite stagnant. As we began 2023, there has been a renewed flow of capital. Bond investors are re-engaging, and investment banks are starting to create pools, and transactions are occurring. We anticipate a slow start to the year. Although conditions have improved, it will take time for things to normalize. That being said, we have observed a significant rally in credit spreads over the past four to five months compared to the fall. You have likely noticed fluctuations in benchmark rates, such as the 10-year and 5-year treasuries, especially after the recent employment report. Overall, rates have improved enough for the refinancing markets to be accessible for certain assets, but the situation remains volatile and could change rapidly. The positive news is that transactions are taking place. We have completed one refinance, and we expect another one in the coming weeks, with more to follow as the year progresses. We believe the second half of the year will show considerable improvement compared to the first half.

What do you think is a good placeholder for timing and rate on that loan?

On the Scottsdale loan, we expect to close in the first quarter, and I would estimate the rate to be in the low to mid-5% range.

Our next question comes from the line of Ronald Kamden with Morgan Stanley.

A couple of quick ones. Just going back to some of the targets on levers at the Investor Day at the end of '23. Just trying to tie those comments with sort of the sources and uses. You talked about sort of $315 million and operating cash flow. You take the dividend out, that gets you to $160 million. After you sort of put development spending in, you don't really have a lot sort of left over. Just trying to get a sense of how we get to that leverage target? Is it just basically contingent on an equity raise or how to think about it?

Yes. If you refer to the chart we discussed during our Investor Day, we had included a placeholder for a nominal equity raise. This does not imply that we are committed to raising equity at $13 per share, as it was just a placeholder noted in the footnotes. Furthermore, growth in net operating income is certainly a significant factor for us, as we aim to reduce our target leverage to below 8x over the next year or two. These are the main considerations. We believe we are on the right track to achieve reasonable growth in both NOI and EBITDA between now and next year.

Got it. And then going back to sort of the refinancing question, just on Washington Square, some of the paydown for that loan, only $15 million. But just curious for commentary, both generally in terms of what the servicers are asking for? And more specifically on Danbury Fair or Fashion Outlets of Niagara, if there's any updates there?

Yes, sure. Every case is specific. If you look at Santa Monica Place, it's an asset where there's still a fair amount of leasing to be accomplished. We talked about the Arte Museum with a couple of other names, hopefully, to be announced in the near future. If you were to look, Craig Realty, at taking that asset to market, the outcome would have been dramatically different. So an extension was very efficient for us. It resulted in no repayment of the loan proceeds. Again, that's one isolated example. But generally, the extensions have been very efficient from both a liquidity standpoint as well as a rate standpoint. Frankly, if you step back and look at what's happened historically, if you look at the Fed funds chart, when the Fed has increased rates, there's typically been a fairly significant falloff of those rates shortly thereafter. So if you think about extensions for 3 to 4 years, not only is it efficient in the moment, it's very efficient from a rate standpoint because you're not locking yourself into higher rates for a longer period.

So it's combining not just what we expect in terms of rate, but also taking a look at the inverted yield curve and trying to find the right duration. If you combine those, you end up with a three- to five-year term seems to work best for us, and that's the strategy we've pursued.

And then if you look forward, we do have some financings that we do think we'll be able to get accomplished. A couple of the highlights for the balance of the year. We'll be financing Tysons Corner towards the end of the year, obviously, a marquee asset for us. We think that should very well likely be an incremental liquidity event for the company. We attempted to finance Danbury Fair last year. The markets closed up on a couple of different occasions. I think it's very realistic to assume over the next several months that we could get that asset financed. It's got an awful lot going for it, trending in the right direction from an occupancy and absorption standpoint. So I think that's a financing we'll be able to get accomplished here within probably the next couple of quarters.

And we have reached the end of the question-and-answer session. I'll now turn the call back over to Tom O'Hern for closing remarks.

Thank you for joining us today. Again, we're pleased to report a strong conclusion of 2022, and we look forward to reporting to you over the coming year as 2023 unfolds.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.