Macerich Co Q4 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to Q4 2023 Macerich Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Samantha Greening, Director of Investor Relations. Please go ahead.

Thank you for joining us on our fourth quarter 2023 earnings call. During the course of this call, we’ll be making certain statements that may be 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. 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’d turn the call over to Tom.

Thank you, Samantha. By now, it’s old news, but on Monday, we announced my pending retirement after 31 years at Macerich. Today is my 118th Macerich earnings call and my last. I will miss all of you. I would like to say I’ll miss all of you, but I’m not so sure about that. When I joined Macerich 31 years ago, it was to help Mace Siegel and Ed Coppola take the Company public. We did that in March of ‘94. Our total market cap was a modest $650 million. Today, our market cap is $11 billion. We went from having a portfolio of malls in the mid-markets, doing about $350 a foot in sales, to a portfolio in major coastal markets doing $836 per foot in tenant sales. There’s been a dramatic improvement in the quality of the portfolio to say the least. When I joined Macerich in 1993, there’s no way I could have imagined being here 31 years later. Nothing in my Iron Man background prepared me for a run of veteran. I will be forever thankful to my Macerich colleagues and friends for our collective accomplishments. Today, Macerich is extremely well positioned for the future as I pass the baton of leadership over to a man most of you know, Jackson Hsieh. He’s the right person to take the Company forward and to continue to execute on our strategy of densifying and diversifying our portfolio of top-quality town centers. Regarding the upcoming leadership change, there is a detailed press release and 8-K on the topic, so I will refer you there. Now, to focus on the quarter, I’m very happy to be leaving on extremely positive news. We had a strong fourth quarter, which included same-center NOI of 3% for the quarter and 4.5% for the year. Occupancy is now up to 93.5%. That’s a 90 basis point improvement over the end of 2022. We had a total shareholder return of 46% for 2023. That’s a top 10 finish among all REITs. We posted positive leasing spreads of 17.2% for the year. We had quarterly EBITDA margin improvement of over 100 basis points versus the fourth quarter of last year. Our partnerships sold a One Westside office building to UCLA for a pro rata share of $175 million to Macerich. We did over $890 million of financings that was closed or committed in the fourth quarter. More on that from Scott in a minute. We signed over 4 million square feet of leases during 2023. That’s an all-time Macerich record, and that’s on the heels of the prior record, which was set in 2022. Portfolio average sales per foot was $836, down slightly from last year, but nonetheless a sign of strong sales activity. Bankruptcies continued to be at a record low. We continue to expect gains in occupancy and net operating income as we progress through 2024 and into ‘25. Also, keep in mind, as a result of the very strong leasing activity in ‘22 and ‘23, we have a very large and healthy leasing pipeline with nearly 2.2 million square feet of leases that have been signed but are not open yet. Once those tenants open, it is going to fuel our NOI growth in ‘24 and ‘25. And now, I’d like to turn it over to Scott to discuss in more detail the financial results, earnings guidance and the significant financing activity we had in the past few months.

Thank you, Tom. This morning, we’re extremely pleased to report a strong finish to the year. As Tom noted, same-center NOI increased 3% during the fourth quarter of 2023 relative to the fourth quarter of ‘22. When excluding lease termination income for the year, 2024 same-center NOI growth, excluding lease termination income was a positive 4.5%. FFO per share for the fourth quarter was $0.56 and was $1.80 per share for 2023 for the year. The quarterly result was $0.03 or 5.7% more than FFO during the fourth quarter of 2022 at $0.53 a share and was in line with consensus estimates for the quarter. FFO for the year was in line with our most recently issued guidance, which was a midpoint of $1.80 per share. Primary major factors contributing to the quarterly FFO per share increase are as follows. One, an $11 million increase in rental renewals, which included a $13 million increase in top-line minimum rent, a $2 million increase in recovery revenue, which were offset by a $4 million decline in percentage rent. These trends are consistent with what’s been reported over prior quarters; they’re driven by improved occupancy growth and rental rate as well as a continued conversion from variable to fixed rent structures with CAM and tax recovery charges. Secondly, we had a $9 million increase in termination income. This was primarily driven by a single lease termination deal, which was a very strategic transaction that we expect will facilitate a major future redevelopment opportunity. These positive factors were offset by the following: one, an $11 million unfavorable increase in interest expense due to rising rates. This figure excludes accrued default interest, which is consistent with our reporting over the prior quarter. And then secondly, a $4 million decline in noncash straight-line rental revenue, primarily from the conversion of GAAP to cash rents for the lease with Google at One Westside, which Tom mentioned we’ve disposed of as of year-end. To recap, as we have emerged from the 2020 pandemic, same-center NOI growth generated by our high-quality Class A portfolio has been tremendous, with NOI growth averaging 7.4% in both ‘21 and ‘22, followed by 4.5% same-center NOI growth in 2023. We are extremely pleased with our resilient core NOI growth during the past three years. This morning, we issued our initial guidance for 2024 funds from operations. 2024 FFO is estimated in the range of $1.76 to $1.86 per share, or $1.81 per share at the midpoint. Here are several details underlying this earnings guidance. The FFO range includes an estimated same-center NOI growth in the range of 2.25% to 3.25%. In terms of quarterly cadence for our 2024 estimated FFO guidance, we expect approximately 21% in the first quarter, approximately 24% in both the second and third quarters, and the remaining approximately 31% within the fourth quarter of 2024. Primary major factors that result in a reconciliation between 2023 actual funds from operations and 2024 estimated FFO are as follows: Same-center NOI is estimated to contribute roughly $0.10 of FFO this year. We had roughly $0.03 of FFO estimated from a relative improvement in valuation adjustments pertaining to our investment in direct investment in retailers. And we had roughly a $0.015 year-over-year increase from the acquisition of our partner’s interest in Freehold Raceway Mall transaction, which closed in the latter part of 2023. These positive factors will be substantively offset by the following: one, a $0.07 increase in interest expense when viewed on a same-center basis, two, an anticipated $0.04 decline in land sale gains. We’ve spoken about this in the past. This decline is due to the robust disposition activity from our land sale program that we’ve undertaken since 2021, which has significantly depleted our undeveloped land inventory that remains. Lastly, about a $0.015 per share dilutive impact from increased share count which is primarily driven from the Company’s various share-based compensation plans. To emphasize, consistent with 2023, our 2024 outlook continues to reflect healthy operating cash flow generation of approximately $300 million after recurring capital expenditures and leasing costs but before payment of dividends. More details regarding our guidance assumptions can be found on Page 15 of the Company’s Form 8-K supplemental that was filed early this morning. On to the balance sheet. Over the past few months, we have made considerable progress addressing our debt maturities. In December, we closed a $710 million five-year CMBS refinance of the $666 million loan on Tysons Corner Center. The new loan bears interest at a fixed rate of 6.6% and is interest only for the entire loan term. Also in December, our joint venture sold One Westside, as Tom alluded to, to UCLA for $700 million. The existing $325 million loan on the property was repaid, and approximately $78 million of net proceeds were generated at our 25% ownership share. In January, we closed a $24 million five-year bank loan refinance of the existing $23 million loan on Chandler Boulevard Shops. The new loan bears variable interest at SOFR plus 2.5% and is interest only for the entire duration of the loan term. In January also, we repaid the majority of the loan on Fashion District in Philadelphia, roughly $8 million remains, and that matures in April and is anticipated to be repaid at that time. In January, we closed a $155 million 10-year CMBS refinance of the existing $117 million loan on Danbury Fair. The new loan bears interest at a fixed rate of 6.39% and is interest only during the 10-year loan term. We are currently working with the loan servicer on a multiyear extension of the $86 million loan on Fashion Outlets of Niagara, and we do expect this transaction to close later this month. Once closed on that Niagara extension, we will have a very manageable $400 million of maturities remaining in 2024 and across three separate loans. To recap the year, we’ve been extremely active in the debt capital markets during 2023, and year-to-date so far in 2024 across eight transactions, including Niagara, we will have refinanced or extended eight loans totaling $2.9 billion or $2.1 billion at our ownership share. This activity included a 4.5-year renewal and upsizing of our $650 million revolving corporate credit facility during the third quarter of last year. And let’s remind ourselves that closing was amidst the regional banking crisis within the United States. So we’re very pleased with our activity throughout last year and to start this year. A year ago, we anticipated improvement in the debt capital markets during the latter portion of 2023 given that the Federal Reserve was expected to be then near the end of its historic rate hiking cycle. And in fact, that expectation has proven true. We’re now finding significant opportunities to finance our assets within the sustained strong performance of our Class A retail. We also believe that we are benefiting from a rotation of financing capital away from the office sector and into the Class A retail real estate sector. Our recent transactional activity supports that thesis. In mid-November, we acquired our partner’s half share in Freehold Raceway Mall for $5.6 million and the assumption of our partner's share of debt. We now own 100% of Freehold Raceway Mall. We currently have approximately $657 million of available liquidity, which includes $490 million of capacity on our corporate credit facility. And with that, I’ll turn it over to Doug to discuss the leasing and operating environment.

Thanks, Scott. We closed out 2023 with very strong leasing metrics and leasing volumes. In fact, 2023 was a historic and record leasing year for Macerich, dating back 30 years as a public company. Year-end 2023 sales were down 1.8% from year-end 2022, and after a post-pandemic spike in spending across all retail categories, 2023 was clouded with increasing interest rates, inflation, and the constant threat of a recession. In addition, we’ve definitely seen a change in spending habits with consumers now focusing on travel, dining out, entertainment, and various other services. This doesn’t come as a surprise, and we expect 2024 to once again normalize and ultimately reflect more traditional consumer spending habits. Sales per square foot as of December 31, 2023, were $836. That’s down slightly from $847 at the end of the third quarter, and that’s primarily due to a decline in the sales of electric vehicles. Trailing fall leasing spreads were a very healthy 17%. As of December 31, 2023, that’s up 660 basis points from the third quarter and up over 13% when compared to December 31, 2022. In the fourth quarter, we opened 391,000 square feet of new stores. For the full year 2023, we opened almost 1.6 million square feet of new stores, which is 80% more square footage than we opened during the same period in 2022. Notable openings in the fourth quarter include an expanded and newly reimagined American Eagle flagship at Tysons Corner Center; Five Below at Valley Mall, Levi’s at Los Cerritos, Pandora at Stonewood, and North Face at Broadway Plaza and FlatIron Crossing. In the digitally native and emerging brands category, we opened Beyond Yoga at Broadway Plaza, Purple at Los Cerritos, Warby Parker at Chandler, and YETI at Washington Square. In the international category, we opened Aritzia and Intimissimi at Corte Madera, Lululemon at Freehold Raceway Mall, UNIQLO at Green Acres, Zimmerman at Scottsdale Fashion Square, and Zara at Queens Center. Lastly, in the experiential category, we opened Camp at Tysons Corner and Round1 Spo-cha at Arrowhead Town Center. Now let’s take a look at the new and renewal leases we signed in the fourth quarter. In the fourth quarter, we signed 186 leases for 1.1 million square feet. For the full year 2023, we signed leases for 4.2 million square feet, and that’s up from 3.8 million square feet or 12% when compared to the same period in 2022. As I mentioned earlier, 2023 was a record leasing year for Macerich over the past three decades. Notable new lease signings in the fourth quarter include Buck Mason, Kate Spade, Mango, Maggiano’s, and Level 99 at Tysons Corner, Round1 at Chandler, Dave and Busters at Freehold, a launch in ShopRite at Green Acres, a second office lease with San Bernardino County at Inland Center, Arteryx at Washington Square, True Food Kitchen at 29th Street, and BOSS at Scottsdale Fashion Square. As always, our focus in the fourth quarter was in large part addressing our lease expirations, finalizing 2023, and getting a head start in 2024. In doing so, in the third quarter, we signed over 130 renewal leases with 84 brands totaling 475,000 square feet. With that, we’re basically done with 2023 and now have commitments on 44% of our 2024 expiring square footage with another 34% in the letter of intent stage. 2023 was another year of newness for us. Once again, bringing new unique and emerging brands was a major initiative for our leasing team and a way for us to really reimagine and differentiate our town center from our competition. To that end in 2023, we signed leases with over 80 new Macerich brands, totaling just over 600,000 square feet. Examples include Beyond Yoga, YETI, Club Studio, Shoprite, Level 99, Maggiano’s, Elephante, and Ketch, just to name a few. Turning to our leasing pipeline. At the end of the fourth quarter, we had 126 signed leases for 2.2 million square feet of new stores, which we expect to open in 2024, 2025, and 2026. In addition to these signed leases, we’re currently negotiating another 80 leases for new stores totaling almost 600,000 square feet, which will also open in ‘24, ‘25, and ‘26. So in total, that’s over 2.8 million square feet of new store openings throughout the remainder of this year and into 2026. I want to emphasize that these are new leases with retailers not yet open and not yet paying rent, and these numbers do not include renewals. I can tell you that this leasing pipeline of new store openings accounts for $64 million of incremental rent, which represents roughly 8% of our current net operating income, and this incremental rent will continue to grow as we approve new deals and sign new leases. To conclude, our leasing and operating metrics were very solid in 2023. There was only one bankruptcy in our portfolio in the fourth quarter and only 10% for all of 2023. The bankruptcies overall in both 2022 and 2023 were at their lowest levels since 2013, which is consistent with our significantly reduced tenant watch list. Leasing volumes were at record levels, the result of which is a very strong, vibrant, and exciting pipeline of tenants slated to open this year and into 2026. As I’ve said in the past, and it remains the case, while there’s still uncertainty in the macroeconomic environment, to date, we continue to see a little pullback from the retailers. I think this is a result of the very healthy retailer environment that exists today, as well as a testament to our best-in-class portfolio of super-regional town centers. So given this and everything Tom and Scott discussed, we remain optimistic as we look to 2024 and beyond. Now, I’ll turn the call over to the operator to open it up for Q&A.

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

Congratulations to Tom and Ed, and I wish you both the best in retirement. Jackson, since Tom mentioned you are the right person to take things forward, what are your initial thoughts? I know you just started, but should we anticipate any strategy changes at this time?

Jeff, it’s Tom. Jackson is actually not with us here. He’s enjoyed much-deserved time off. He starts March 1, so I’ll just ask you to hang on to that question until then, Jeff.

Okay. Sorry about that, if I miss that. If I could then ask Doug, and congratulations, Doug, on a great ‘23 in terms of leasing. I appreciate all the stats you provided, including where you stand today on ‘24. I think you said 80% commitments, square footage, 44% in LOI stage, I guess would you be able to compare that to where you stood a year ago as you entered ‘23, which turned out to be a record year? Like how do you feel today versus one: year ago?

Well, there are two parts to that question, Jeff. I think the first part, you were referring to our lease expirations. We’re basically done with all of our expiring square footage in 2023, and we have commitments on 44% of our 2024 expiring square footage and another 34% in the letter of intent stage. So we’re about 77% there with 2024 expiring square footage. I think the other part of the question really referenced more of our leasing pipeline in which we said we had 126 leases signed for 2.2 million square feet. That’s just about, Jeff, where we were at this time last year, give or take a little bit.

And then if I can then ask a second question. What are you assuming in terms of bad debt lease termination income in ‘24? And how does that compare, let’s say, to ‘23 or maybe versus historical?

Jeff, I’ll take that. This is Scott. Bad debts, we’re assuming those to start to normalize a little bit more relative to 2023. I would say that’s about a $0.02 headwind in 2024 against our same-center. I don’t expect those to be significant in the fullness of time, but I do expect them to be a little bit larger than they were in ‘23, which frankly was a net reversal, and that was just a continuation of recovering some of those latent fully reserved receivables in ‘23. I expect most of that to be out of the pipeline now, and it will be trending a little bit more normal. Lastly, termination income, we did provide line item guidance for that, which is $10 million, and that was down about $3 million or so, give or take, versus where we finished in 2023.

The next question comes from Greg McGinniss with Scotiabank.

This is Viktor Fediv here on with Greg McGinniss. I wanted to follow up on this lease termination income in Q4. I know probably you cannot provide some specific details. But overall, what type of tenant was that? And you mentioned that it opened some strategic opportunity for you to redevelop that center. So when you kind of provide some more details on that?

Yes, you’re correct that I can’t share specifics about the tenant or the asset. However, as I mentioned earlier, most of that termination fee—almost all except for roughly $1 million to $1.5 million—came from a single transaction. This transaction was a key location for us, and we anticipate it will create a significant redevelopment opportunity. We are currently in the predevelopment and preplanning stages, as well as handling entitlements. Once we finalize the scope, costs, and expected returns, which we project to be in the low double-digit range, we will include this information in our pipeline. It’s a valuable opportunity, and we’re pleased to have completed that transaction.

And then the second question, probably on leasing demand part. So given that department stores sales were weaker versus broad retail sales in 2023, do you expect more optimization to occur within that space? And have you had any conversations with your tenants about that already?

So I’m not quite sure I caught all of that question. I would say this, though, and this is probably a good thing. As we look into 2024, I would not expect us to put up the same type of volume that we did in 2023 because, in all candor, we’re running out of large-format inventory running out of boxes, big anchor locations. Over the last few years since 2021, we’ve leased about 2 million square feet and over 20 anchor locations. So it’s been very productive.

Yes, I think you’re going to continue to see the shift away from department stores and into other big box uses. You saw us open Shields Sporting Goods, for example, in a former department store space. You’ll see us open an Art Museum in the former art-like theater space. We’re going to continue to see different types of uses, diversified uses, taking the department store space and converting that into other uses that frankly drive more sales and traffic. That’s a trend we’ve seen accelerating over the last five years, and that is going to continue as we go forward.

Our next question comes from Samir Khanal with Evercore.

Tom, congratulations on your retirement. We will miss you. So Scott, just on same-store NOI guidance here. Certainly, leasing is very strong. The pipeline looks great in ‘24. But I just want to kind of dive into the same-store NOI growth that is moderating in ‘24. Maybe help us think through the drivers of that lower growth in ‘24 at this time.

Sure, Samir. I'll explain it. We've seen significant growth over the past three years, as I mentioned earlier. However, we are facing more challenging comparisons now. Additionally, operating expenses remain quite high due to factors such as insurance costs, security labor, and bad debts, which are all contributing to a headwind of about 150 basis points in the same center. Given the strong leasing environment and our efforts to remerchandise, we are taking some spaces offline, which adds a bit of downtime to our same-center guidance. I would estimate this accounts for roughly a 1% headwind in the same center. However, this is a positive step as we are removing underperforming merchants and replacing them with more attractive ones, creating a more diversified mix that can attract traffic and achieve better sales volumes at improved rent levels. This is typical in a strong leasing environment. These are some of the key factors at play. Additionally, as we do each year, we are including reserves for any unanticipated events in our guidance.

And just from a modeling perspective, help us think through G&A for the year and also percentage rents?

Sure. For G&A, if I were to suggest a run rate, looking at 2023, I would anticipate a small decrease in management company expenses, net revenues, and rate expenses for 2024. Additionally, regarding the G&A line, if you check our last proxy on Page 50, you’ll find the combined compensation for Ed Coppola, Tom O’Hern, and from the 8-K, you can determine Jackson's compensation. This will lead to a notable reduction in G&A due to the changes in CEO and President. And then, Samir, you also asked about percentage rents. If my memory is right, about 12 months ago, I said we do expect roughly a 15% to 20% decline in percentage rents into 2023 from 2022. And in fact, that played out. If you look at our percentage rents on a pro rata basis, they were down about 16% in ‘23 versus ‘22. And again, largely, that was a function of conversion of variable rent to fixed rent type structures. I think we worked through the vast majority of those at this point, Doug. I don’t expect a lot more of that. As we look into 2024, and we’re looking at percentage rent trends versus ‘23, I expect those to continue to tick down, but not nearly as significantly as they did in 2023. We’re estimating roughly about a mid-single-digit decline in percentage rents, and some of that is just as you get escalations and base rents, you get an increase in breakpoint. So there’s a natural transition of variable rent to fixed rent on that basis. But I don’t expect the type of leasing activity converting variable to fixed rent that we had in 2023 at all.

The next question comes from Floris Van Dijkum with Compass Point.

Great. Thanks. Can you hear me?

We can hear you Floris. Loud and clear.

Great. Tom, congrats on the retirement. Good luck in your next venture, whatever you wind up doing.

Thank you, Floris. I remember you when you were 25 and fresh out of UVA, and we’re going to visit malls in Northern California.

I remember that time, and it was actually one of my lowlights. I don’t want to share too much on this call, but yes, I recall it. It was memorable. I have two questions for you. First, one of the challenges in the mall sector, which isn’t unique to you, is that there are concerns about growth in the centers. Could you discuss this? Last year, there was strong underlying growth, and you’re anticipating a slight slowdown this year, likely with some conservatism factored in. Can you elaborate on the key drivers for growth? You mentioned the S&O pipeline; could you provide more details on what percentage of that pipeline includes luxury tenants? I know there’s a significant opportunity at Scottsdale. How much of a growth driver could that be for you moving forward?

Well, I’ll let Doug talk about luxury in a second, Floris. But as for people saying they don’t see the growth in the mall sector, then they’re clearly ignoring the facts. All you have to do is look at record leasing volumes in ‘22 and ‘23 and then drill down a little deeper and look at the types of tenants that are coming in, replacing traditional retail. This isn’t apparel retail. This isn’t footwear. These are new uses, new and creative food and beverage like Pinstripes, Lifetime Fitness, for example, very actively coming in, and they can generate an additional 5,000 to the center. We just that one tenant alone, adding our 10 museum, they expect to have 1 million visitors per year coming to the top level of Santa Monica Place. So, there are a lot of exciting new uses that, frankly, we didn’t have 10 years ago. So I think whoever said they didn’t see the growth driving to the mall business, the A-quality mall business was sadly mistaken because all these new uses are driving traffic, they’re driving sales, they’re driving productivity. They’re driving rent and they’re going to drive NOI.

Floris, it’s Doug. Regarding your questions about luxury, a few years ago, we completed the luxury wing at Scottsdale Fashion Square and the Neiman Marcus wing. Late last year and early this year, we shifted our focus to introducing global luxury to the Nordstrom Wing. A few calls back, we announced Hermes, which is a key tenant for that property, and we will be sharing more announcements in the coming months. To Tom’s earlier point, I frequently discuss our leasing pipeline, which stands at 2.2 million square feet set to open in the next 2.5 years. Those figures are impressive. What truly excites me, however, is the variety of new and exciting uses we will be incorporating. Consider concepts like Din Tai Fung, Elephante, True Food Kitchen, Vuori, H&M, Primark, Dave and Buster’s, Kiln, Lifetime Fitness, and others like Pinstripes, Target, and Level 99. The real advantage of this pipeline lies not just in the numbers but in the diverse range of offerings that we will be introducing to our town centers over the next couple of years.

Great. Maybe a follow-up with Scott. I know you mentioned that Niagara is going to get refinanced, and that might surprise some people myself included, who thought that might transition back. I know you probably can’t say a whole lot, but does this mean that you will be investing leasing capital in this asset on a going forward basis? And what do you think that can do to the operations for this property going forward as well?

Sure. Floris, you’re right. I can’t speak in too much detail because the transaction is still in process. We do expect to secure a multiyear extension of that. The asset still does generate some FFO. It certainly has its challenges given its market positioning with north of the border in Canada and the local market. There are still some opportunities for that asset, and we’ll continue to capitalize on those opportunities. But the bottom line is it’s a negotiation that’s still in process. It’s earnings accretive to retain that asset, and we’ll report back once we close.

The next question comes from Todd Thomas with KeyBanc Capital Markets.

First, Tom, Ed, congratulations on your careers and best of luck in retirement. I wanted to revisit a previous question. I know Jackson hasn't started yet, but Tom or Scott, could you share your thoughts on where you see opportunities for Jackson to make an impact as you consider the organization today and look toward the future?

I’m not going to speak for Jackson. He’ll be starting soon, and you can ask him directly, but I know he does like our strategy of densifying and diversifying our high-quality town centers, and he found that very interesting and appealing. Other things he may be considering I will leave to him and let him articulate directly to you and others on this call.

I appreciate the information regarding the S&O pipeline and the lease signings and letters of intent you’ve completed for the 2024 expirations. Can you share your expectations for tenant retention this year and discuss any known move-outs or seasonality trends after the holiday season compared to previous years, where there has been significantly less seasonality than usual?

Thank you, Todd. I believe that for 2024, we expect tenant retention to be between 90% and 95%. This means we anticipate that for our lease expirations in 2024, we will retain 90% to 95% of our tenants.

I believe the second part of your question was about any unexpected consequences following the holiday. I wouldn’t say there is anything unusual. If we look at the period from 2016 to 2019, we certainly had some indications in the fall of tenants likely to close, and they were closing at significant rates. We haven't experienced that in recent years at all. I can't recall any retailer mentioning plans to shut down five or six stores after the holiday season.

Yes, Todd, we’ve discussed this extensively. Many retailers that were struggling before the pandemic unfortunately didn't survive it. However, those that did emerge are in a very strong position. As I noted in my prepared remarks, the retail sector is quite robust, featuring companies with solid balance sheets. Retailers in 2023 and heading into 2024 are already focusing on managing their inventory levels, which is crucial for maintaining profitability and improving margins, ultimately strengthening their position. We aren't observing any pullback, and our watch list is at its lowest point in 20 years. Therefore, I don't expect any unusual developments in 2024.

The next question comes from Michael Mueller with JPMorgan.

Tom, congratulations. It’s been great working with you over the years.

Likewise.

And I just have one quick one for Scott. Just curious, what’s embedded in the 2024 guidance for NOI margin improvement relative to what you had in 2023?

Yes, Mike, I believe we will see ongoing improvements in margins. Our rental rates are increasing, and occupancy is growing. Additionally, our pipeline will contribute more as we approach the second half of the year, which remains quite robust. In fact, the pipeline is expected to generate about $64 to $65 million in incremental rent compared to current usage, particularly heavy in the latter half of the year. On the other hand, operating expenses will continue to be a minor drag, but not significantly so. Overall, I expect to see year-over-year margin improvement by the end of the year.

The next question comes from Ki Bin Kim with Truist.

Congrats, Tom. And going back to some of the debt execution that you’ve done in 2023 and what you have in 2024. Are there some trade-offs that don’t show up in the interest rates to solve things like CapEx reserve requirements or other clauses that might be a little bit more restrictive?

Yes. We are consistently focusing on our underwriting to ensure we receive full credit for our pipeline. With the depth of the pipeline, as we approach deals in locations like Tysons or Danbury, we must allocate capital for any tenants that are not yet operational. This effectively means we're prefunding that capital, which we will recover over the next 6 to 12 months. For Tysons, there was approximately an additional $40 million in liquidity, much of which was earmarked for capital expenditures related to various restaurant operations. We recently talked about Level 99, a new entertainment venue on the east side of the center, for which we also needed to reserve anticipated leasing capital to facilitate its opening and rent payments. Other than that, the environment appears quite normalized. We are successfully closing deals, and liquidity is available again. I’m pleased to report that we accounted for about 25% of the total volume in CMBS, which amounted to a bit over $7 billion in transactions in 2023. The markets are operational, and we have been transacting at rates in the mid-6s.

And what is like a broad refinance rate that we should assume for 2024 refinancing?

I’d say we’ve been transacting in the mid-6s, and that’s probably representative of where we’ll be this year. We’ll have to see what the Fed has in store for us for the next 12 months. But based on where we see the forward curve, that’s probably a reasonable expectation.

The next question comes from Haendel St. Juste with Mizuho.

This is Ravi Vaidya on the line for Haendel. I hope you are all doing well. I have a couple of questions. Can you provide the target for leverage at the end of year '24? Additionally, would you consider issuing equity at the current prices? I remember you mentioned at the Investor Day that you weren't planning to issue equity until reaching the previous target of around $18 a share, and we're getting close to that now. I just wanted to follow up on that.

Ravi, I’ll take the second half of that question. We always reserve the right to issue equity. So I’m not going to give you a hard and fast rule in terms of a dollar amount. You’ve seen us in the past judiciously use our ATM, and we have an ATM in place today, and that’s another tool in the capital toolkit that we would keep available to us. So it’s certainly possible. And look, we’re very focused on delevering over time. That can happen in a few ways, one of which is to drive same-center NOI up, which we fully plan to do. The other way to effectively reduce debt-to-EBITDA is via equity leases. So we wouldn’t preclude ourselves from doing that. We do not have any of that in the guidance, but that’s consistent with past practice as well. Scott, do you want to comment on leverage?

Yes. Sure, Ravi. To your first part of your question, I think we could see 40 to 50 basis points of improvement in leverage by the time we get to the end of the year. Roughly 8.2x is kind of where we’re triangulating based on the business plan today.

The next question comes from Caitlin Burrows with Goldman Sachs.

Congrats, Tom, on your retirement. Maybe starting with Santa Monica Place in Scottsdale Fashion Square, I feel like the expected openings are getting closer on those. And I think combined, they’re supposed to have an incremental NOI of around $50 million at your share. So I’m just wondering if you can give some further detail on the timing of recognizing that NOI? Like could it start in the first half of this year? Or any other details you can give?

Santa Monica, we’ve got some exciting uses coming first level, Club Studio, which is high-end fitness, third level, Arte, both of those are going to be done in the first half of 2025. So, you’ll see some bleed into 2026 there. Din Tai Fung will also be a use that we hope to get online either at the end of this year or beginning of next year. So, all those are very accretive leases that we expect to be on board certainly by the second quarter of 2025.

Got it. And maybe you guys talked earlier in the call about how percent rents were down in ‘23 because more was being shifted to base rents, which makes sense. I was wondering if you could go through any details on how much that kind of phenomenon impacted leasing spreads like that the expiring ABR might have been lower and related kind of the level of leasing spreads that you reported in 4Q of almost 20%. Do you think that’s sustainable?

Sure. Great question. Yes. Certainly, if you look at our expiring rents in 2023, they were a lot lower than what we expected in 2024. And that was really driven again by all those shorter-term deals that we did during COVID, which had more variable rent, and we’re accessing those throughout 2023 and renewing those on a longer-term more typical fixed rent structure. So as we reported trailing 12%, 17% spreads at the end of the year, and I would expect those base rent spreads to be roughly 50% of that level in 2024. Really, again, just a function of a relatively artificially low base rent expiring in ‘23 and a more normalized level of base rent expiring in 2024.

The next question comes from Nick Joseph with Citi.

Just hoping you could walk through the capital needs and the funding plan for leasing-related CapEx and any incremental redevelopment in 2024.

Sure. In my opening remarks, I mentioned that we expect to generate around $300 million of operating cash flow after accounting for recurring capital expenditures and leasing costs, before paying dividends. As I look at the development pipeline for 2024, 2025, and 2026, I believe it will range between $150 million to $200 million over those three years, with 2024 likely falling around the midpoint of that range. We are currently working on about 8 to 10 anchor boxes that we expect to re-tenant and complete by the end of this year, which will also prepare us for larger-scale redevelopment projects, potentially at Green Acres and FlatIron in 2025 and 2026. This should give you an idea of the nature of our expenditures.

The next question comes from Alexander Goldfarb with Piper Sandler.

Tom and Ed, certainly for two decades of working with you guys in REIT land. It’s been awesome, and we’ll miss our NAREIT interaction. So I wish you guys the best in your next endeavor. So I have two questions. The first question is, Scott, on the Danbury mall loan, you know how much I like that mall. Can you just help us walk through and interpret the $155 million new loan relative to the value of that mall? Just given the sales that it does and the dominance in that northern region, would think that the loan is under-levered relative to the value of the asset. Obviously, the market today is a tough market to do debt. So maybe just some perspective around how we should interpret the loan balance relative to where the market value of that asset would be sort of in normal times, obviously not right now when people are skittish.

Sure. Yes, it’s a great asset. It’s virtually 100% occupied. I think there’s one or two available storefronts. So very happy to get a 10-year deal on it, stagger out that maturity, et cetera, et cetera, especially at a very attractive rate. The loan to value, if I recall correctly, was in the low 40s based on appraisal. We typically, as you know, from following us for many years, finance in the 55% realm. So yes, there’s a little bit of liquidity on the table, but it’s the state of the market today. And I think it was a great execution hitting a window. Recall, we’ve been trying to finance that thing through a difficult capital market environment for almost two years. So it was really nice to be able to window and execute well at a good rate.

Okay. And then the second question is on the JV, the Freehold and Chandler JV. You bought out Freehold, but Chandler still seems to be a JV. So maybe you could just talk a little bit about what drove the JV to sort of cleave off the asset? I think you guys said $5.6 million that you used to acquire that. What was unique about that asset versus Chandler that still is in JV? Or should we expect something to happen in the near future on Chandler as well?

Alex, really, we can’t comment on what motivated or didn’t motivate our partner in that case. It was really their decision. But when given the opportunity, we liked the economics, we liked the asset. We had a chance to do that on Chandler, but that was really driven by them and their preference.

The next question comes from Ronald Kamdem with Morgan Stanley.

Congrats Tom and Ed. I have a couple of quick questions. Regarding the recent management addition, while I can't comment on Jackson, I'm curious about the process. Specifically, are there any particular skills or experiences you are seeking? Additionally, can you explain why this is the right time for the transition? I'm looking for more insight into the process you are considering.

Yes, Ron, I’ll refer you to the press release and the 8-K. We did an exhaustive search. We used Ferguson Partners, a very well-known firm that specializes in executive recruitment, and we considered a lot of candidates. Those of you that know Jackson know he’s very qualified and capable, and I think we’ve got an outstanding replacement. In terms of the timing, every CEO should really go out when their company is in a good spot and when they have their health. So that’s why it’s good timing. Macerich is in great shape, and I’ve got my health. So this is the perfect time for me to move on to all those things that I put on the back burner for the last 30 years.

Yes, it’s a wait. I think you’ll see it hitting the pipeline. We are in predevelopment and entitlement mode right now. It’s going to be a very attractive project. Frankly, that’s a gem from the two assets that we acquired back in the 2012, 2013 timeframe. Green Acres has performed extremely well. We added a power center. We’ve been able to re-tenant the mall. In total, the entire property, the entire campus generates over $1 billion of sales, and we’re really, really excited to bring this next phase, but we’re studying it, and it will hit the pipeline over the next few quarters.

I show no further questions at this time. I would now like to turn the call back to Tom for closing remarks.

Thank you, Michelle. Thank all of you for joining us today. All kidding aside, I would like to say that it’s been my pleasure to work with you, and I will miss all of you. As I approach retirement, I’m highly confident in the future of the Company under the leadership of Jackson, our Board of Directors, and the balance of our incredibly talented leadership team here at Macerich. I wish you all the best.

This concludes today’s conference call. Thank you for your participation. You may now disconnect. Have a great day.