Earnings Call Transcript - MAC Q2 2022

Operator, Operator

Good day, and welcome to The Macerich Company Second Quarter 2022 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Samantha Greening, Director of Investor Relations. Please go ahead.

Samantha Greening, Director of Investor Relations

Thank you for joining us on our second quarter 2022 earnings call. During the course of this call, we'll be making certain statements that may be deemed forward-looking within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, including statements regarding projections, plans or future expectations. Actual results may differ materially due to a variety of risks and uncertainties set forth in today's press release and our SEC filings, including the adverse impact of the novel coronavirus on the U.S., regional and global economies and the financial condition and results of operations of the company and its tenants. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included in the earnings release and supplemental filed on Form 8-K with the SEC, which are posted on the Investors section of the company's website at macerich.com. Joining us today are Tom O'Hern, Chief Executive Officer; Scott Kingsmore, Senior Executive Vice President and Chief Financial Officer; and Doug Healey, Senior Executive Vice President of Leasing. With that, I turn the call over to Tom.

Tom O'Hern, CEO

Thank you, Samantha, and thanks to all of you for joining us today. We are very pleased to report another strong quarter with the majority of our operating metrics trending very positively. After a strong first quarter, we also had a very strong second quarter. We saw a high level of retailer demand, and the resiliency of the American consumer was again on display, which is reflected in the 2.2% tenant sales increase in the second quarter compared to a very tough comp quarter of the second quarter of '21. Our portfolio average annual sales per foot for tenants under 10,000 square feet was $860, that's our highest level ever. We continue to see traffic at about 95% of pre-COVID traffic, but tenant sales are exceeding 2021 levels and also pre-pandemic levels. First half of '22 sales were up 7.6% versus the first half of '21 and sales per foot were up 11% compared to the pre-COVID quarter ended in the second quarter of 2019. The quarter's leasing activity continues to reflect retailer demand that is at a level that we have not seen since 2015. Some of the other second quarter highlights include an occupancy level at 91.8%, which was a 240 basis point improvement from the second quarter of '21 and a 50 basis point improvement on a sequential basis compared to the first quarter of '22. We saw strong leasing volumes for the quarter, significantly in excess of pre-COVID levels. For the quarter, we executed 274 leases, that's a 27% increase over the second quarter of last year and a 42% increase over the pre-COVID quarter of 2Q '19. We saw same center NOI growth of 5.4% in the second quarter compared to the second quarter of '21, which was yet another strong quarterly gain. FFO per share came in at $0.46. We beat the midpoint of our guidance, narrowed our guidance range, and bumped it up. We continue to ramp up our development efforts as we move past COVID-19. We have numerous near-term openings with many exciting large format retailers, including Scheels All Sports at Chandler, Caesars Republic Hotel at Scottsdale Fashion Square, Target at Kings Plaza, Lifetime Fitness at both Broadway Plaza and Scottsdale Fashion Square, Pinstripes at Broadway Plaza, and Primark at both Green Acres and Tyson's Corner. These projects will be funded with excess cash flow from operations. All these deals have been signed and are under construction, but rent will not commence until '23 or '24, which speaks very well for our continued NOI growth going forward. In addition, we are pretty excited to announce the addition of a 130,000 square foot Target to Danbury Fair Mall. The signing of Target completes the repurposing of yet another former Sears Box. Primark is already in the upper level, and Target will occupy the remainder of the building. Target chooses its real estate very carefully, so the decision to locate in Danbury and Kings Plaza is an enormous testament to the quality of the real estate. Focus now on the leasing environment briefly, and Doug will elaborate in a moment. As expected, given the depth and breadth of the leasing demand, we had a very strong quarter. Leasing continues to come from a wide variety of categories, including health and fitness, food and beverage, entertainment, sports, co-working, hotels, and multi-family. In addition, the digitally native brands continue to increase their move into brick-and-mortar locations, including Alo Yoga, Allbirds, and Vuori, as well as electric vehicle companies, such as Lucid, VinFast, and Polestar. Bankruptcies continue to be at a record low. As we move through the balance of the year, clearly, there are economic uncertainties due to inflation, rising interest rates, and the war in Ukraine. However, we continue to expect gains in occupancy, net operating income, and cash flow from operations through the remainder of this year and into next year. In addition, on recent news last week, the Philadelphia 76ers announced that they're planning to build a new arena on a portion of the current Fashion District Philadelphia. We will continue to work collaboratively with the 76ers to be in a position to close on our transaction with them sometime in 2023. Obviously, we believe the impact on the Center City of Philadelphia and the local communities, as well as on the Fashion District Philadelphia, will be very positive. More details will follow as we get closer to closing in 2023. And now, I'll turn it over to Scott to discuss in more detail the financial results for the quarter.

Scott Kingsmore, CFO

Thank you, Tom. Onto the highlights for the quarter. This morning, we posted strong operating results. Same center NOI increased 5.4% versus the second quarter of 2021, excluding lease termination income, and increased 7.8% when including lease termination income. Year-to-date, through the first six months of the year, same center NOI has now increased 14% excluding lease termination income and 18% including lease termination income. FFO per share for the quarter was $0.46. This was an expected $0.13 lower than the second quarter of 2021, which was $0.59 per share, and it represents a $0.01 per share increase over FFO consensus estimates, which were $0.45 per share for the second quarter. Primary factors contributing to our quarterly results for FFO are as follows. One, a $21 million net of tax relative quarter-over-quarter decrease in valuation adjustments pertaining to our investments in retailers, which were unusually high in the second quarter of 2021. Secondly, a $13 million decrease in gains from land sales. Bear in mind that these transactions can obviously be lumpy by nature quarter-over-quarter. And again, these were unusually large in the second quarter of 2021, creating a difficult comp. Third, an $8 million decrease in non-cash straight line rent income, resulting from the high level of pandemic-driven rental assistance that we granted to our tenants last year in the second quarter of 2021. Offsetting these negative factors were the following. One, an $8 million reduction in interest expense, which resulted primarily from the company's dramatic $1.7 billion or 20% debt reduction during last year. Two, $5 million of net benefit, resulting from a $14 million quarterly reduction in rent abatements, which was offset by a $9 million relative negative change in bad debt expense between the second quarter of last year and the second quarter of this year. During the second quarter of '21, we recognized roughly $10 million in reversals of prior bad debt reserves as we then finalized numerous pandemic-driven workout agreements with our tenants. And then finally, we had about a $5 million improvement in lease termination income. This was driven by a large settlement with a single tenant during the second quarter of this year. This morning, we updated our 2022 guidance for funds from operations. We narrowed the range and increased the midpoint for our FFO estimates. 2022 FFO is now estimated in a range of $1.92 to $2.04 per share, which represents a $0.01 per share FFO guidance increase at the midpoint. This FFO range now includes an increased expectation for same center NOI growth in the range of 5.5% to 6.75%, roughly a 60 basis point increase over our prior NOI guidance. Our estimates of '22 same center NOI growth have continued to improve as the year progressed, we're pleased to report that. They have increased from $4.75 at the midpoint of our initial guidance to over 6% based on our current guidance from this morning. We also increased our guidance for both lease termination income, as well as interest expense. At the guidance midpoint, we anticipate a $21 million or 5% improvement in FFO in 2022 versus 2021. As a reminder, our FFO guidance also includes an estimated $10 million decline of non-cash straight line of rents between last year and this year. Excluding that non-cash straight line of rent impact, FFO is estimated to increase by a little over $30 million this year, roughly 7% growth, which represents an increase of $0.14 per share. Our 2022 outlook continues to reflect a healthy increase in operating cash flow. You could look for more details on our guidance assumptions on Page 16 of the company's Form 8-K supplemental financial information, which we filed this morning. As for the balance sheet, thus far during 2022, we have been very active in the capital markets. On February 2, we closed a $175 million refinance loan on FlatIron Crossing with a floating rate loan at SOFR plus 3.7%. On April 29, we closed a $72 million 10-year refinance on Pacific View in Ventura, California at a fixed rate of 5.29%. On May 6, we closed a two-year extension of the $168 million loan on the Oaks at a fixed rate of 5.25%. Earlier this month, we secured a one-year extension of our existing $164 million loan on Danbury Fair, which was at a fixed rate of 5.5%, unchanged versus the prior rate. Since we reported to you during our first quarter earnings call, the Fed's actions to temper inflation are significantly impairing debt financing activity within all commercial real estate sectors. Mortgage financing has slowed during the past several weeks. As a result, we will continue to utilize loan extensions as an important tool within our capital plan. We have been extremely successful securing extensions, dating back to the summer of 2020, albeit for different reasons during the pandemic. In fact, we secured nine such extensions for over $1.6 billion dating back to September of 2020. In the meantime, while we secure those extensions, we will prepare to execute on longer-term refinancing transactions once the markets reopen and become more liquid. Including undrawn capacity of $459 million on our line of credit, we have over $630 million of liquidity today. Debt service coverage is a healthy 2.7 times. Net debt to forward EBITDA excluding leasing costs at the end of the quarter was 9.0 times. We expect roughly $235 million of free cash flow after dividend and recurring capital expenditures this year. So we are well positioned in today's environment from both the standpoints of liquidity, as well as cash flow generation. Now I'll turn it over to Doug to discuss the leasing environment.

Doug Healey, Senior Executive Vice President of Leasing

Thanks, Scott. Leasing momentum continued in the second quarter, fueled by a very healthy retailer environment, sustained sales growth, and increased occupancy. Second quarter sales were up 2.2% over second quarter of 2021. Year-to-date sales were up 7.6% when compared to the same period last year. Sales per square foot as of June 30, 2022, were $860, and this represents an all-time high for our company. Occupancy at the end of the second quarter was 91.8%, an increase of 240 basis points relative to 89.4% at the end of the second quarter of 2021. We remain confident, given the healthy retailer environment that exists today, coupled with our strong leasing pipeline, that occupancy will continue to increase throughout 2022 and into 2023. Trailing 12-month leasing spreads remain positive at 0.6% as of June 30, 2022, compared to a negative 0.2% as of June 30, 2021. I'm happy with the progress we are making on our 2022 lease expirations. To date, we have commitments on 71% of our 2022 expiring square footage with another 22% in the letter of intent stage. While we put the finishing touches on 2022, we're well on our way with addressing our 2023 lease expirations. In the second quarter, we opened 221,000 square feet of new stores. This brings our year-to-date store openings to over 400,000 square feet, about 20% more square footage than we opened during the same period last year. Notable openings in the second quarter include Free People in William Sonoma at The Village at Corte Madera, Love Sac at Freehold Raceway Mall and Country Club Plaza, three Windsor Fashion Stores at Green Acres, Kings and North Park, and nine stores with Cotton On, totaling almost 45,000 square feet. In the digitally native and emerging brands category, we opened Fabletics at the Village at Corte Madera, Stance at Arrowhead Towne Center, Interior Define at Tysons Corner, three Leap stores at Scottsdale Fashion Square, Broadway Plaza, and Kierland Common, and three Quay stores at Arrowhead, Broadway, and Fresno Fashion Fair. In the entertainment category, at Vintage Faire, we opened a 35,000 square foot Dave & Buster’s on the second level of the former Sears building. In conjunction with Dick’s Sporting Goods, which previously opened on the first level of Sears, we've now substantially finalized the remix of this building with two best-in-class tenants. It's interesting as I think back about all the fear and uncertainty that the media portrayed around Sears bankruptcy and subsequent store closures; I can't help but think about the opportunity these closings gave us. They provided us the chance to accommodate great game-changing tenants, not only Dick’s Sporting Goods and Dave and Buster’s, as I just mentioned, but also the likes of Primark, Target, Burlington, Zara, Whole Foods, and Round1, just to name a few. It's the perfect example of replacing a non-relevant retailer with higher and better uses. Turning to the new and renewal leases that we signed in the second quarter, we signed 274 leases for 1.2 million square feet. Year-to-date, we've signed 494 leases for 1.8 million square feet, right on par with where we were at this time in 2021. Keep in mind, 2021 was our best leasing year in terms of volume and square footage since 2015. In terms of leasing activity for new stores only, during the first half of 2022, we signed 45 more leases for over 20% more square footage than we did in the first half of 2021. Continuing with our initiative to bring the very best entertainment concepts to our properties, we signed two Round1 deals in the second quarter, one at Danbury Fair and one at Arrowhead Towne Center. For those not familiar, Round1 is a multi-entertainment and activity complex out of Japan, offering bowling, arcade games, billiards, darts, ping pong, karaoke, and food and drinks. Round1 at Danbury will be 60,000 square feet and located in the front of the center under the recently expanded and renovated Dick’s Sporting Goods. At Arrowhead, Round1 will introduce its 80,000 square foot Spo-Cha concept. Spo-Cha, which stands for sports challenge, will be all things Round1 with the addition of sporting opportunities, such as basketball, batting cages, soccer, dodgeball, and roller skating. Other important signings in the second quarter include anthropology at Biltmore Fashion Park, athletic at SanTan Village, Chanel beauty at Broadway Plaza, Garage at Fresno and Scottsdale, Lululemon in North Face at Washington Square, and Timberland at Fashion Outlets of Chicago. In the food and beverage category, we signed Raising Cane’s Chicken at Washington Square, Shake Shack at Kings Plaza, and Wood Ranch at the Oaks, just to name a few. Lastly, as we shift to emerging brands, in the second quarter, we signed leases with Alo Yoga at Broadway Plaza and Kierland Commons, Everlane, Tonal, and Purple at Tysons Corner, Blue Nile at Broadway Plaza, Allbirds and Interior Define at Kierland Commons, and Quay Australia at Arrowhead and Vuori at The Village at Corte Madera. In conclusion, our leasing metrics are very strong, the best they have been since 2015. Sales remain ahead of pre-pandemic levels, occupancy continues to increase, we have a very healthy retailer environment, and bankruptcies are at an all-time low. We continue to outpace 2021 in our biweekly deal review by almost 40%. While the future remains unknown, we have seen very little pullback from the retailers. Most importantly, given our best-in-class AA+ portfolio, a very strong leasing pipeline of signed new leases still to open this year, next year, and even into 2024, together with the depth and breadth of uses, we are extremely well positioned to further reimagine and reposition our centers in a way that will continue to attract shoppers, regardless of what lies ahead. Now I’ll turn it over to the operator to open up the call for Q&A.

Operator, Operator

And we'll go first to Greg McGinniss with Scotiabank.

Greg McGinniss, Analyst

Just want to ask about the guidance range; it still seems kind of fairly wide at this point in the year. So I'm just curious kind of what brings you to top end or the bottom end of that guidance range?

Scott Kingsmore, CFO

I'd say a couple large variables contribute to what I would consider to be a relatively wide range versus where we typically guide middle of the way through the year. First is just the impact to tenant sales on variable rents. It's not a normal year as we continue to normalize following the pandemic and dealing with what's going on today in the macroeconomic environment. So that's one variable that contributes both to the wider range on NOI, as well as FFO. We do have a relatively large pipeline of land sales we have spoken about previously; those can close in one quarter versus the other. So there is some variability there. Those are really the two biggest drivers, Greg.

Greg McGinniss, Analyst

And so I guess kind of what's included then from the land sales side or what's the expectation? And then on the tenant sales, have you had much success in terms of converting those leases back to mostly base rent?

Scott Kingsmore, CFO

On the land sales side, I'll just say that we are probably going to finish the year $0.02 or $0.03 ahead of where we were last year to give you a sense for that. We haven't provided specific guidance, but it is a pretty large contributor to FFO, so I think it's important to highlight that. As far as converting variable to fixed rent, yes, we are finding a great deal of success as we renew 10, 12, 15 stores at a time. Primary focus is to lock that in on a fixed rent basis, obviously, to get growth in our aggregate rents, but also to lock it in on a fixed rent basis with annual bumps. So we're finding great success in doing so. Doug, anything to elaborate on that?

Doug Healey, Senior Executive Vice President of Leasing

No, you nailed it, Scott, right on.

Greg McGinniss, Analyst

And just to clarify. So what's the expectation then in terms of tenant sales contribution or overage rent when we think year-over-year?

Scott Kingsmore, CFO

We're not giving specific guidance on percentage rent line item by line item. I'll say that our perspective this year is a little bit better than it was six months ago when we were first speaking about guidance. Tenant sales started off relatively strong, almost 8% for the first half of the year. So as a result, our percentage rents are a little bit better, which has contributed somewhat to the increase in our NOI range over the last couple of quarters.

Operator, Operator

We’ll go next to Derek Johnston with Deutsche Bank.

Derek Johnston, Analyst

So your team has successfully secured debt extensions for the year. Now I believe only two, but relatively larger refinancings are left in Santa Monica and Washington Square, and not till late this year and both are high-quality centers. So do you have any early indication on rate or banks' willingness to work with you on these loans? I mean, anything you can provide here I think would be helpful.

Tom O'Hern, CEO

To respect the process that we have going on with those lenders, I'm not going to be too specific. But I would expect that we'll be successful recasting those loans. They could be short-term in nature just given what's going on in terms of the financing markets. Obviously, you mentioned what's happening in my opening remarks. It could be that those are short-term in nature, and then we get another bite of the apple a couple of years down the road. The rates on those are relatively low, as you see, and I would expect some tick-up in rates. But again, to respect the process that's going on right now, I won't be able to provide any further specifics.

Derek Johnston, Analyst

And then just leasing. The 2Q print showed really undeniable solid leasing volumes paired with positive total base rent growth. So what type of demand are you seeing for the second half of the year? Is tenant demand changing in any way, shape, or form, any pushback on rate given the economic slowdown, or any leasing notables, positive or negative, you could share are always helpful?

Tom O'Hern, CEO

It's hard to predict what the second half of the year will be like. We've certainly seen a very strong first half from all different types of uses. As we've raised occupancy 240 basis points over the last year, that's given us more ability to push rate. Initially coming out of COVID, we were chasing occupancy a little bit; occupancy had gotten down to 88%, which is our all-time low. But now that we're getting close to where we were pre-COVID, which is 94%, it gives us a lot more ability to push rates. In terms of tenants pulling back, I'm going to turn it over to Doug, because we have surveyed almost all of our major retailers to get their opinion on what they’re going to do with open to buys.

Doug Healey, Senior Executive Vice President of Leasing

To Tom's point, with all the noise going on in the economy and the somewhat uncertainty, we thought it prudent to proactively reach out to the retailers, the national retailers, and we did that. We probably surveyed between 25 and 30 top national retailers to take their temperature on their open buys. I would say the vast majority of them, probably 90%, have not changed but are open buys, and are going to continue on with what they promised in 2022 and 2023, and that’s as of today. So the demand is still there.

Operator, Operator

We'll go next to Craig Schmidt with Bank of America.

Craig Schmidt, Analyst

What is tempering leasing spreads? I mean the 0.6, I mean, your sales are growing strong, your cost of occupancy seems pretty attractive. But what do you think is keeping your leasing spreads from going mid-single-digit to even double-digit?

Tom O'Hern, CEO

That's a good question, Craig, and frankly, a question I put forward to our leasing team every couple of weeks. We are kind of at that friction point now where there is not that much space left, and we can start pushing rates. I would expect that to change. It can fluctuate quite a bit quarter-to-quarter. But as you point out, our occupancy cost now at 11.7% is significantly lower as a result of increasing sales than it was pre-pandemic, which was about 13%. So as we go forward, I would expect that we should be able to get some more traction regarding re-leasing spreads.

Doug Healey, Senior Executive Vice President of Leasing

As we've talked about on previous calls, when we hit our trough in occupancy during the pandemic, we were focused entirely on driving occupancy, and we did that. As Tom mentioned, we are at that sort of inflection point right now where we've taken enough supply off the table to be able to focus more and more on rates. I think you are going to see those spreads increase in the next two quarters.

Craig Schmidt, Analyst

You have opened a couple of new entertainment centers, Round1 and Dave & Buster’s, and I know you still have plans to introduce entertainment, I think, to Santa Monica Place and some of your centers. What are you seeing from them in terms of traffic generation to your properties where you have introduced these entertainment concepts?

Tom O'Hern, CEO

That use, that category, is extremely strong right now. There was a lot of uncertainty coming out of the pandemic if this category was going to perform the way it did pre-pandemic. We have seen nothing but great results from any of the entertainment uses that we implemented. Clearly, their success is our success because they drive a ton of footfall to our centers, and they are very destination-oriented.

Operator, Operator

We’ll go next to Floris Van Dijkum with Compass Point.

Floris Van Dijkum, Analyst

So I guess to start off with, can you quantify what your signed, not open pipeline is in terms of percent or basis points?

Scott Kingsmore, CFO

It's about 2% within our leased occupancy signed but not yet open, and that again is small shop space. In some cases, you have got anchor locations, which are not reflected in that number. Tom mentioned that in his prepared remarks that those units, which are large cash flow contributors, will not come online until ‘23, ‘24. So those will be important drivers of cash flow. And bear in mind, of course, as we recaptured anchor space that was paying very little to no rent from the former department stores, that's a pretty handsome spread that's just sight unseen to you. So about 2% in our small shop numbers.

Floris Van Dijkum, Analyst

And if you were to quantify that as a dollar amount, do you have that number as well?

Scott Kingsmore, CFO

We don't have that…

Floris Van Dijkum, Analyst

That would likely include the anchor space, which would be interesting. My follow-up question is about whether there is a significant difference in refinancing debt, especially since it would presumably be easier when discussing with a bank instead of a CMBS servicing. Could you remind us whether Santa Monica is CMBS and what the situation is with Washington Square? Also, what about Green Acres early next year? Can you explain the differences in the discussions you are having?

Scott Kingsmore, CFO

We've approached both balance sheet lenders as well as CMBS servicers over the last 18 months or so to secure those extensions, actually 24 months almost. We're working with both sets, both groups, and really it’s a pretty open dialogue. You talked about where the assets positioned and what's going on today; everybody recognizes that the market is pretty dysfunctional. Again, just to emphasize, not just for malls; it's across the board. We've seen it impact the industrial sector, multifamily sector, the lodging sector. I think you're probably familiar with what's happening. So they're aware and they're very willing to work with you. I would say, and I think I've mentioned this in the past, our assets are very well positioned from a debt yield standpoint. Certain of those assets, I think, will still generate significant liquidity to us, should we choose to take out that liquidity next year. So these are well-positioned assets and, as you mentioned, high quality when you're thinking about Santa Monica Place, Washington Square, Green Acres, etc.

Floris Van Dijkum, Analyst

I mean the one thing is that, if you were to take out additional proceeds out of any loan, would that be used to unencumber some assets? Is that how you're thinking about it?

Scott Kingsmore, CFO

Generally used to pay down debt will be strategic about what type of debt we repay, but yes, that will be the primary focus.

Operator, Operator

We'll go next to Alexander Goldfarb with Piper Sandler.

Alexander Goldfarb, Analyst

So two questions. First, Scott on the guidance, obviously, the Fed's been pretty active on rates, and doesn't show any signs of slowing down. But if I look at your interest guidance for the year from last quarter, which was 267, and now is 272, I would have thought it would have gone up more. A number of the other REITs have definitely been revising up their interest expense expectations for this year and even next. So maybe just a little bit more color, because it sounds like maybe this is playing into some of your land sales and what your debt pay down thoughts are. Just want to better understand how you’re viewing floating rate debt and interest expense, given this is much smaller than I would have expected.

Scott Kingsmore, CFO

I don't have the exact numbers in front of me, but we made a similar change three months ago to our interest expense guidance. It was roughly $0.02 or so. We had already reassessed three months ago, and this is just an incremental change. So two incremental changes, and I think you will find it's relatively comparable to perhaps what you have seen with other coverages that you have.

Tom O'Hern, CEO

Alex, one thing to keep in mind is we have a very small amount of floating rate debt; only 12% of our total debt is floating. As rates move, it takes a while for us to be impacted because in a given year we are refinancing three or four secured mortgages. So there is not an immediate impact. Certainly, probably a lot of the other companies you report on probably have a much higher percentage of floating rate debt.

Alexander Goldfarb, Analyst

So Tom, what you're saying is even including these refinances and loan extensions you are doing where the rates are going up, this guidance obviously includes that, and it sounds like what you're saying.

Tom O'Hern, CEO

No, that's true. Again, keep in mind, it's only going to be a partial year. By the time we get these extensions and restructurings done, you are only talking about a partial year, and that's…

Alexander Goldfarb, Analyst

The second question pertains to the same store. Last year, the adjustment for the non-same store pool was quite significant, while this year it is positive. Scott, could you provide more details on the adjustment factors, specifically the $35 million that was removed from last year and the $206 million added this year to adjust from the total portfolio to the same store?

Scott Kingsmore, CFO

Specifically for the audience referring to Page 8 of the supplemental, the biggest change is the $35 million adjustment from last year. Two factors in there: One is the retailer investment income that we mentioned in our prepared remarks; that was the lion's share of it. Two, we did dispose of a couple of assets last year, La Encantada and North Bridge, and those are non-same center adjustments in that same center reconciliation table on Page 8. So that's what you see there.

Operator, Operator

We’ll go next to Linda Tsai with Jefferies.

Linda Tsai, Analyst

In terms of the portfolio sales growth, are there certain pockets of retailers seeing strength versus others?

Doug Healey, Senior Executive Vice President of Leasing

Year-to-date, actually all categories have been positive with the exception of shoes. So we are seeing it across the board.

Linda Tsai, Analyst

I understand this is a few years away, but regarding the stadium, how do you evaluate the loss in NOI from the part of the Fashion District that you're giving to the developers compared to the growth expected from the rest of the center once the stadium is built?

Tom O'Hern, CEO

As you said, it's out there a few years. But if you remember, Fashion District Philadelphia had its grand opening in November of 2019. We were releasing into the fourth quarter and then COVID hit. The reality is today is we have got available space. It's envisioned that one-third of the space we have would end up being the arena, and two-thirds would remain retail. We have got the room to move most of those tenants from one section of the property to another, and that's part of what's going on today, as we speak. We've got the ability to do that really without losing any NOI. We expect that the traffic, the excitement, and the volume of people, the commerce that an arena would bring would be very positive for our leasing. It's a few years out, but we think we'll start seeing an impact fairly quickly. This deal is not done, so we can't elaborate too much on it, but we expect to close with HBSE sometime in ‘23.

Operator, Operator

We’ll go next to Michael Mueller with J.P. Morgan.

Michael Mueller, Analyst

I guess first, given the inflation levels that we've seen, are the new lease escalators that you're signing into leases today materially different than the escalators that you were baking into leases pre-COVID?

Scott Kingsmore, CFO

No, identical. 2% to 3% on base rent, 4% to 5% on recoveries, taxes are a pass-through. It's the same structure, and obviously, a more healthy cash flow stream as we recast some of those short-term variable deals from the COVID period.

Michael Mueller, Analyst

And then second question. What is the temporary leasing percentage today, and where do you think that could go to by the end of say 2023?

Scott Kingsmore, CFO

Yes, it's about mid-7s today, and I think it's realistic to assume we could probably get 150 to 200 basis points of improvement over the next year and a half.

Operator, Operator

We’ll go next to Greg Newman with Citi.

Unidentified Analyst, Analyst

I guess my first question maybe dovetails to an earlier question, but you guys have highlighted the sales per square foot number several times this call. But the earlier question also referenced the fact that the rent growth has been a little bit more modest. I'm just kind of curious if you were to inflation adjust those sales per square foot number or maybe look at it on sort of an operating profit basis for your tenants. I mean, is the cost of occupancy actually as good as it looks in the supplemental when you're kind of factoring in the cost pressures that all your tenants are facing? Maybe that's why you're not getting the rent growth?

Tom O'Hern, CEO

It's hard to pinpoint a specific reason for that part of it; it is just the number of deals that come up in a given quarter and are negotiated. Our tenants really have not complained much about inflation and the impact on what's going on with them. Obviously, the wages are under pressure. Supply chain issues largely have been resolved. Their biggest complaint really is the availability of labor. As a result of that, in many cases, they've got to pay more for that labor. That's where we're getting the biggest complaints in terms of number of complaints. In terms of the occupancy cost as a percentage of sales; no, I think that's a valid reflection on what's happened as a result of sales increases primarily.

Unidentified Analyst, Analyst

And then just a second question; I'm just curious on One Westside with Hudson. Are they still in the exclusivity period on buying at your interest in that property, or where are you in that process of potentially just selling that interest and using those proceeds to pay down debt?

Tom O'Hern, CEO

That's an asset that has been turned over to Google. Google is doing their build-out. I think the expectation is for them to occupy the space either later this year or early next year. Our partner has a call on that asset. We have a put on that asset. But right now, we like the asset, and we like the NOI that's going to be thrown off from that asset. We're not really in a hurry to do anything there. But we both have the right to do that if either one of us chooses to.

Operator, Operator

We will go next to Todd Thomas with KeyBank Capital Markets.

Todd Thomas, Analyst

Tom, first question: You mentioned that traffic remains steady at roughly 95% of pre-COVID levels during the quarter. A lot's happened in the last three or four months, and it looks like the first quarter was stronger than the second quarter in terms of sales growth. I'm just curious if you could talk about how traffic and sales trended within the quarter sort of April through June, maybe into July, whether there has been any trends or changes within the quarter?

Tom O'Hern, CEO

I think the big difference on sales is that the first quarter of '22 was going against a very weak first quarter of '21 because that's right when Omicron hit. We had a big surge in COVID, and people were back to wearing masks and things just slowed down. Compared to the second quarter of '21, which is our comp right now that we're talking about, that was a very strong quarter because things bounced back pretty quickly there. The reality is, traffic is holding steady at 95%, and people are tending to come in; they know what they're looking for, they're in and out quicker, and that has a bearing on the traffic numbers. But the reality is the rate continues to be higher than it was pre-COVID because sales are higher than they were pre-COVID. It's not a bad situation; I think consumers are just more educated when they come in.

Todd Thomas, Analyst

And just remind me what's embedded in the guidance in terms of sales growth in the back half of the year?

Scott Kingsmore, CFO

We are not going into too much detail regarding our sales estimates, Todd. I want to emphasize that our outlook on percentage rents is more favorable than it was six months ago, considering how we have started the year. We are certainly not being overly optimistic about our tenant sales assumptions. This is one of the reasons we have provided a range. We will see how the rest of the year unfolds.

Tom O'Hern, CEO

Keep in mind that a lot of the retailer sales are cyclical and they fall in the fourth quarter. It’s hard to get a real accurate view on what percentage rent is going to be until you see their fourth quarter numbers, and that’s when they go over the break point. Under the accounting rules, you can’t recognize percentage rent rateably through the year; you have to do it only once they have exceeded their annual break point. That’s why we have the range. Last year was a record year, and we did not forecast another record year on top of that; it’s somewhere in between where we were pre-COVID and last year.

Todd Thomas, Analyst

And then if I could just follow up on another question. I think previously you discussed a bunch of large format retailer openings at a number of centers that are underway with rent commencing through '24. I guess the next couple of years, what's the expected spend through '24 to generate the NOI associated with those REIT redevelopments, and sort of what's the NOI yield on that spend? I guess how much NOI are you looking at commencing on an annualized basis from some of these larger format anchor tenants? If we look on page 33 in the supplement, it doesn't look like that's the totality of the projects that you're discussing on. I was just wondering if you could give us a little bit more detail in both the spend and the associated NOI.

Tom O'Hern, CEO

Todd, on the spend, it's roughly $100 million that is going to be spent this year for the full year and about $150 million next year. The vast majority of those are the large format deals we are discussing, and those deals have been signed but are not paying rent yet. I think Floris asked the same question regarding how much rent that is. We don’t have that number at our fingertips but it’s fairly significant. The return on cost on those projects is going to be around in the 10% to 15% range on average. Those will commence over the next year through 2024, and you’ll see those rents come online.

Operator, Operator

We’ll go next to Haendel St. Juste with Mizuho.

Unidentified Analyst, Analyst

This is Ravi on the line for Haendel St. Juste. Have you noticed any differences in sales productivity, relatively speaking, between the Sunbelt and Coastal markets?

Tom O'Hern, CEO

No, we really haven't. Our sales have been pretty much consistent both from a category standpoint and from a geographical standpoint.

Unidentified Analyst, Analyst

Just one more here. I know there haven't been a lot of trades recently. But can you give us a read regarding where transaction cap rates for Class A malls stand right now in this environment?

Tom O'Hern, CEO

Well, you're right; there have been no trades, so it's really hard to pinpoint where that is today. There haven't been any trades for a number of years, so we really don't have anything to point to there.

Operator, Operator

And at this time, there are no further questions. I'll turn the call back to Tom O'Hern.

Tom O'Hern, CEO

Thank you. We’ve enjoyed a solid start to 2022, and we look forward to reporting our results for the balance of the year over the next several months. Thank you.

Operator, Operator

This does conclude today's conference. We thank you for your participation.