Macerich Company (The)

Good day, everyone. Welcome to the Maystritch Company second quarter 2021 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jean Wood, Vice President of Investor Relations. Please go ahead.

Thank you for joining us on our second quarter 2021 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 filing, including the adverse impact of the novel coronavirus, COVID-19, 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 8K with the SEC, which are posted in the investor section of the company's website at nacerich.com. Joining us today are Tom O'Hearn, Chief Executive Officer, Scott Kingsmore, Senior Executive Vice President and Chief Financial Officer, and Doug Healy, Senior Executive Vice President of Leasing. With that, I will turn the call over to Tom.

Thank you, Jean. And thanks to all of you for joining us today. As you read in our 8K this morning, we had a very good quarter. As we pass the midpoint of the year, we find ourselves at an inflection point. As we said at our last call, we expected occupancy to hit a low point at March 31st of 2021, and that appears to be the case. As we look today, almost all of our operating metrics have started to trend positive, including occupancy. And many of these metrics are even trending positive compared to the pre-pandemic second quarter of 2019. Improving operating results, including leasing volumes, occupancy gains, and most importantly, tenant sales, which have trended very positively. In fact, to give you some month-by-month numbers, March tenant sales were up 8.6%. April sales were up 9.9%. May and June were both up a strong 15%. Those increases are versus the same periods in 2019. We're not comparing sales to 2020. Those are compared to 2019. Traffic is still lagging a bit at around 90% of pre-COVID levels on average. So what we're seeing is an improved capture rate for the retailers compared to pre-COVID. We do expect traffic to continue to increase in the second half of the year. I would say brick and mortar mall based retail is back with a vengeance, albeit helped to some degree by stimulus checks and revenge buying. Because of the robust leasing environment, it feels much better to us than when we emerged from the great financial crisis in 2009 and 2010. Some of the second quarter highlights include on a sequential basis occupancy gains of 90 basis points. Leasing volumes for the quarter and year to date were in excess of 2019 levels. We saw same center NOI growth of 11.5%. We expect the second half of 2021 to be even better. We raised the bottom end of our FFO guidance range and moved the midpoint up, even factoring in the impact of issuing equity during the second quarter. In terms of balance sheet activity, we used the ATM to a small degree in June. Since our last earnings call, we issued 6.4 million shares at an average price of $18.20. We raised $114 million of capital, and that was used to reduce debt. Trading was good for us in the quarter and in June, and we ended the second quarter as a second best-performing REIT of 58%. Another balance sheet activity, in addition to our sale of Paradise Valley Mall in March, we're still expecting to close on the sale of another non-core asset or two in the second half of 2021. And that's in our guidance. Net proceeds expected to be in the $100 million range. The balance sheet moves we made in the first half have significantly improved our leverage metrics. Year to date, we've paid down over $1.3 billion of debt. Focusing for a moment now on leasing, we're seeing incredible demand for space, including big box space and perimeter locations. And that includes multifamily, healthcare, fitness, wellness uses, food and beverage, and other traditional, non-traditional retail uses. A great example of the latter is that during this past quarter, we announced a 222,000 square foot Shields Sporting Goods lease in the former Nordstrom's box at Chandler Fashion Center. This store will be their first in Arizona and will feature a 16,000 gallon saltwater aquarium, a wildlife mountain, a restaurant and more. Non-traditional mall retail demand in smaller format also continues to accelerate with the digitally native brands getting active again on brick and mortar locations after a hiatus during COVID. Other interesting additions include a host of new electric car companies taking space in many of our malls, including Polestar and Lucid, who've done multiple deals with us this year. Many of our traditional retailers are back with even greater demand for space than pre-pandemic, and Doug will elaborate on that in a few moments. We are very optimistic about our business as we move forward to the balance of the year and into 2022. For the most part in the US, with 58% of the population vaccinated, the worst of the pandemic is behind us. The leasing environment is strong and getting better by the month, and we expect significant gains in occupancy, net income, and FFO growth as we move through the year and into next year. And now I'll turn it over to Scott to discuss in more detail the financial results for the quarter.

Thank you, Tom. Before I report on the financial highlights of the quarter, I would like to make an announcement. At the end of this year, Jean Wood will be hanging up her investor relations cleats and stepping gracefully into retirement. Jean has been an incredible asset to Mace Rich for the past 27 plus years. Her dedication to the company started within just a few months after Mace Rich's IPO in 1994, and we sincerely appreciate her contributions, her partnerships, and her friendship over these many, many years. Over the coming months, Jean will be transitioning her role to Samantha Greening, our new Director of Investor Relations. Samantha has been with Mace Rich for over nine years in various capacities. We are very pleased to welcome Samantha into this new role. And during the balance of the year, please join us by welcoming Samantha and by wishing Jean all the best as she approaches the new chapter in her life. Now on to the highlights of the financial results for the quarter. Same-center NOI rebounded very well in the quarter, increasing 11.5% relative to the second quarter of 2020, including lease termination income. Given the prevalence of retroactive rent relief adjustments within our 2021 results, we believe it is appropriate to measure our 2021 same-center operating performance by including rather than excluding lease termination income. If we were to exclude lease termination income, Same center NOI growth still increased 10.4%. Funds from operations for the second quarter of 2021 was 59 cents per share, up 20 cents or 51% from the second quarter of 2020 at 39 cents per share. EBITDA margin has increased over 6% to 63.9% relative to 57.7% at the end of the second quarter in 2020. and is approaching pre-COVID EBITDA margin of 65.3% at the end of the second quarter in 2019. As Doug will soon explain, our portfolio occupancy rate increased in the quarter and our leasing spreads showed sequential improvement relative to the end of the first quarter of 2021. Suffice to say, this was a relatively noisy earnings quarter with many moving pieces supporting our positive earnings news that we've released today. To expand on those, the primary factors contributing to these NOI and FFO gains are as follows. On the NOI front, one, the quarter increases include a 6-in increase in percentage rents resulting from the dramatic increase in sales that we reported earlier today. Two, common area income has contributed another 4 cents of NOI and FFO, including from our urban parking garages. Our common area business has proven to be quite elastic and resilient and is recovering very well. In fact, our common area revenue performance has exceeded our expectations from when we entered into 2021. And three, bad debt expense represents a comparative 50 million or 23 cent improvement quarter over quarter, including a $40 million bad debt expense incurred during the second quarter of 2020 at the onset of COVID, and a net $10 million bad debt reversal within this last quarter, the second quarter of 2021. Offsetting these NOI factors were, one, $46 million or 21 cents in reduced minimum rent and recovery income from reduced occupancy, as well as approximately $15 million of retroactive rent abatements and rent relief for primarily 2020 rents. To pause on this point, the previously mentioned $10 million bad debt reversal in the quarter should be viewed in tandem with the negative $15 million impact of rent abatements from the second quarter. In other words, the net impact of COVID workout deals on Same Center NOI in the second quarter was a negative $5 million when considering both line items. So if you want to normalize Same Center NOI for what is essentially the majority of the remaining COVID workout deals, than add back 5 million or 3% roughly to same center NOI. Also, as I mentioned last quarter, we expected a reduced amount of retroactive rent abatements in the second quarter, and that was in fact the case. And I also expect that we are, and I also said that we expect a very negligible impact in the second half of the year from such retroactive abatement concessions, and we still expect that to be the case. Secondly, shopping center expenses increased by approximately $0.06. It was driven by the widespread closures of our center in the second quarter of last year relative to the full operational status of our portfolio throughout the second quarter of 2021. And lastly, a few other factors included. One, the second quarter included an increase of positive $0.09 in valuation adjustments, debt of provision for income taxes from our in direct investments in various retailers that Mace Rich has previously invested in through a venture capital firm. This positive impact shows up in other income from unconsolidated joint ventures, and it is worth noting that this was in our thinking when we last updated guidance at the end of the first quarter. And two, the second quarter also included an increase in land sale income totaling approximately five cents, which was factored into our original guidance and planning as we entered into 2021. This morning, we updated the previously issued 2021 guidance for funds from operations. 2021 FFO is now estimated in the range of 182 to 197 per share, which represents a 3 cent increase at the midpoint. While certain guidance assumptions are provided within our supplemental filing, here are some further anecdotes. This guidance range assumes no further government mandated shutdowns of our retail properties This guidance factors in the issuance of common equity to date, which I will further describe in a few moments, and Tom also mentioned previously. As I mentioned during the prior two quarterly calls, we anticipate strong double-digit growth in the second half of 2021, and we still anticipate that to be the case. And just to punctuate what our updated FFO guidance means, Subsequent to our first quarter earnings release, we have issued an additional 6.4 million shares of stock at $18.30 per share, and we are not reducing our FFO guidance for this additional share issuance. In fact, we have increased the midpoint by 3 cents per share, which is also 4 cents or 2 percent greater than consensus estimates. This is due primarily to a much stronger operating environment as reflected within these second quarter results. More details of the guidance assumptions are included in the company's Form 8K supplemental information, which was filed earlier this morning. As for the balance sheet, within our first quarter filings, again, we disclosed that we had sold $732 million of common equity through our ATM programs, again, last quarter. Since then, we sold an additional $116 million in average price of $1,820. As part of our continuing commitment to deleveraging our balance sheet, Since the end of the first quarter and through today, we have repaid approximately $1.3 billion of debt. Sources to accomplish this include common stock sold through our ATM programs and dispositions of various assets, including Paradise Valley at the end of March and numerous sales of undeveloped land parcels in the Phoenix marketplace. As EBITDA continues to improve and as our deleveraging efforts continued in the second quarter, The company's debt service coverage ratio improved to 2.5 times at the end of the second quarter of 21. And as previously stated on many occasions, we still do expect to harvest positive operating cash flow after recurring capex and dividends of well over $200 million per year from 2021 through 2023, which supports a path to continued leverage reduction in the range of eight times by the end of 2023. This relative to leverage in the mid 11s at the end of 2020 on the heels of COVID, including undrawn capacity on our revolving line of credit of which 200 million of the 525 million aggregate capacity is currently outstanding. We have approximately $500 million of liquidity today. From a secured financing standpoint, we are working on an extension of the loan on Danbury Fair through the middle of 2022. And we are currently marketing the shops at Atlas Park for a refinance loan. Those are the company's final two remaining loan maturities within 2021. And as the year has progressed, and as reported to you last quarter, we do continue to see green shoots in the debt capital markets with the execution of a growing number of retail deals on sequentially improving terms. Now, I will turn it over to Doug to discuss the leasing and operating environment.

Thanks, Scott. The leasing environment continues to improve with leasing productivity outpacing COVID 2019 levels. And 2019 was our highest leasing volume year since 2015. Sales were strong in June, and this is on top of a very productive April and May. June small shop sales were up 15% when compared to June 2019. Most importantly, all categories, including food and beverage, showed positive comps for the first time since the beginning of the pandemic. Looking at the quarter, the second quarter small shop sales were up 13% over second quarter 2019. And year to date through June, small shop sales were up 5% when compared to the same period in 2019. Occupancy at the end of the second quarter was 89.4%. That's up 90 basis points from 88.5% in the first quarter. On our last call, we stated that we thought the first quarter would be our trough and we still believe that to be the case. And given the healthy retailer environment that exists today, coupled with our strong leasing pipeline, we anticipate occupancy to continue to increase throughout the remainder of this year and into 2022 and beyond. Bankruptcies. Pace of bankruptcies continues to decrease. In fact, year to date, bankruptcies within our portfolio are the lowest we've seen since 2015. In the second quarter, only two tenants filed for bankruptcy. One of the two tenants was a theater chain and had just two locations with us. Both locations were rejected, and one of those locations has already been released. The other was a small tenant that had eight locations with us, totaling just 9,000 square feet. Trailing 12-month leasing spreads were negative 0.2%. and that's an improvement from negative 2.1% last quarter. Average rent for the portfolio was $62.47 as of June 30th, 2021, and that's flat on a year-over-year basis. 2021 lease expirations remain an important focal point, and we continue to make progress. To date, we have commitments on 81% of our 2021 expiring score footage with another 19% or the balance in the letter of intent stage. And we're well on our way into 2022 business with 27% of the expiring square footage committed and 64% at the letter of intent stage. In the second quarter, we opened 251,000 square feet of new stores, resulting in total annual rent of $6.5 million. Notable openings in the second quarter include Lululemon at Fashion Outlets of Chicago, American Eagle's new concept, Offline Bayeri at Freehold Raceway Mall, Indochino at Washington Square, Starbucks at Fashion District Philadelphia, Blue Nile and Psycho Bunny at Scottsdale Fashion Square, Faraday and Up West at Village Accord of Madera, and Viore at 29th Street. We also opened seven locations with Charming Charlie and four locations with FYE. We opened a 24,000 square foot office for the county of San Bernardino at Inland Center. And lastly, we opened a 95,000 square foot Shoppers World at Fashion District Philadelphia in the former Century 21 space, which we lost last year due to a bankruptcy liquidation. Now let's look at leases that we signed in the second quarter. And this is where it gets really exciting, because unlike store openings, which represent past leasing, recent signed leases represent what we're doing in real time. Signed leases define leasing velocity and are the leading indicator of the leasing environment that exists today. That said, we see the leasing environment as robust and dynamic. This is confirmed by our leasing activity, which is stronger than it's been in recent history. And let me be clear. When I say recent history, I'm not talking about the 16 months we've been dealing with COVID. I'm comparing back to 2019, which again was our highest leasing volume year since 2015. So said another way, we're currently on pace for our highest volume leasing year since 2015. In the second quarter, we signed 223 leases for 692,000 square feet. resulting in $37 million in total annual rent. In the first half of this year, we signed 488 leases for 1.9 million square feet, resulting in $88.7 million in total annual rent. Now, this represents 18% more leases, 34% more square footage, and 11% more rent during the same period from 2019. Noteworthy leases signed in the second quarter include several new to Mace Rich retailers, including Versace at Fashion Outlets of Chicago, Christian Louboutin, Alo Yoga, and Forward at Scottsdale Fashion Square, and Avocado at Village Quarter Madera. These and others bring the total square footage of new to Mace Rich deals either signed or in lease in the last 12 months to just over 530,000 square feet. In addition to Shoppers World opening at Fashion District Philadelphia, which I mentioned earlier, we signed a second lease with them to take over the 72,000 square foot location at Green Acres Mall that Century 21 also rejected in bankruptcy. So by the end of this year, we will have filled the two Century 21 boxes we lost in bankruptcy. And this totals approximately 170,000 square feet, an impressive feat considering Century 21's liquidation occurred just 10 months ago. Other notable leases signed in the second quarter include Free People Movement at Cureland Commons, Warby Parker at Washington Square and La Encantada, Williams-Sonoma and Lucid Motors at Village Accord of Madera, Zweeling Henkels at Tyson's Corner, and Peloton at Washington Square. Turning to our leasing pipeline, at the end of the second quarter, we had signed leases for just over 500,000 square feet of new stores still to open in 2021. And looking into 2022 and 2023, we have signed leases for another 935,000 square feet of new stores to open. In addition to these signed leases, we're currently negotiating leases for new stores totaling 1.1 million square feet, the majority of which will open in 2021 or in early 2022. So in total, that's over 2.5 million square feet of signed and in-process leases for new store openings throughout the remainder of this year and into 2022 and 2023. As stated on our last call, this is the trajectory we expected, and it's only going to improve as we are constantly reviewing and approving new deals on a regular basis. So in conclusion, sales are higher than they were pre-COVID. Occupancy is up from last quarter and is expected to continue to increase. Bankruptcies are at their lowest level since 2015. Leasing velocity is as strong as it's been in recent history. So if I sound overly optimistic, it's because I am. Maybe it's the stats and the metrics we talked about. They don't lie. Maybe it's the mood out in the field. It feels really good. Maybe it's the many different uses we now have to choose from to fill our space. Maybe it's the best in class portfolio of shopping centers we have. Maybe it's all of the above. I don't know. But what I do know is we find ourselves in a very good place and extremely well positioned to take advantage of the strong leasing environment that exists out there today. Now I'll turn it over to the operator to open up the call for Q&A.

Thank you. Ladies and gentlemen, if you'd like to ask a question at this time, please press star and then 1 on your phone. We do ask that you limit yourself to one question and one follow-up questions in order to give everyone a chance to ask a question today. Again, that is star and then one if you would like to ask a question. We'll start with our first question from Derek Johnston with Deutsche Bank.

Hi, everybody. Thank you. You know, we get a lot of questions from investors regarding the balance sheet. which we view as materially de-risked with the $1.3 billion year-to-date debt repayments and really banks' overall willingness to extend maturities and work with you guys. So the question, you know, is what's in store for the second half of the year? And has the 10.4 times consolidated net debt to EBITDA year-end 21 target changed at all? And thank you for the $183 million Danbury Fair maturity statement. call out but you know maybe if you can touch on the 670 million for 2022 and really does any further color on second half balance sheet options would be welcome over to scott to get into some specifics on the uh the maturities we um continue to

focused on selling non-core assets, we think we'll have another transaction or two by year end. So that's another $100 million of liquidity that in all likelihood would be used to deleverage. And as Scott mentioned, we expect cash flow from operations after the dividend and recurring capex to be in the neighborhood of $200 million. So that's additional deleveraging to get to towards our goals. Scott, you want to comment on some of the specific maturities that are coming up?

Yeah, sure. Good morning, Derek. You know, I do expect actually leverage to be in the, you know, probably the nine to nine and a half band by the time you get to the end of the year, subject to some of these transactions closing. But Derek, I think we'll improve on the number that you mentioned earlier. As far as transactions through the balance of the year, I did mention Danbury, which we expect to extend into 2022. Some great things happening in that project, and I do think we'll be able to achieve a very successful refinance into next year. One thing to note is I look at the loan levels on all of our secured debt, Derek. I think they're very well positioned in terms of loan-to-value, in terms of debt yield, and all the traditional metrics that a secured financing lender would look at. So I do expect those financings that occur next year, roughly $600 million to $700 million to to transact quite well. We have seen continued improvement, continued increase in the number of deals that have gotten done. A lot of those are within the CMBS community. We've seen deals ranging from $600 a foot north. So in terms of the quality spectrum, we've seen the quality spectrum shift down a little bit so that the $650 a foot projects are getting financed in. I do think we'll be successful. As you mentioned earlier, we are getting a lot of cooperation from our secure lenders at securing extensions, which I think is appropriate for us to do at this time. And I do think we'll be successful at getting our maturities executed next year. I'm not concerned about that. And to punctuate, you guys know our history in terms of financing secured assets. We've got great access to capital.

And we'll take our next question from Craig Schmidt from Bank of America.

I just wanted to say it's a very impressive list of tenants that you're redeveloping, starting with Shields, the three Primark, and the three Lifetime Athletic. I'm just wondering, I noticed you still think you're going to be able to do all these redevelopments with less than $100 million for each of 2021 and 2022?

Yeah, we do, Craig. You know, not every redevelopment requires an inordinate amount of capital, so we do feel confident that we'll be under $100 million for the next couple years. We're certainly game planning for the future as well. We're getting other projects entitled, including some more major expansions at Los Cerritos in Southern California, at Washington Square in Portland, at Flatiron Crossing in Broomfield, Colorado. as well as Tyson's Corner with the Lord & Taylor box that we have control of. So we're securing entitlements for the future, which will start to ramp up our development pipeline into 23 and 24 and beyond. But we do feel confident in terms of the development spend that we've disclosed to you already for 21 and 2022, Craig.

And are you expecting an 8% to 9% yield on this, or may some of them be higher because they're single boxes?

Craig, it varies, but I'd say on balance it's going to be a high single-digit type return, but it certainly varies. And some, you know, some actually do require no capital, so it runs the gamut.

And we'll take our next question from Floris van Dijkum from Compass Point.

Morning or afternoon, I guess, depending on which time zone you're in. Thanks, guys, for taking my question. I just wanted to just go through the leasing pipeline in a little bit more detail, not necessarily the names, et cetera, but you talk about a 2.2 million square foot pipeline of deals under negotiation. What NOI impact would that be and what percentage of NOI? I mean, if you were to put an average rent on there of you know, 55 bucks, which is your ABR, obviously it's significantly high, but presumably these include a number of anchors which are lower. But just if you can quantify that, that lease pipeline in terms of the NOI impact, that would be appreciated.

Floris, good morning. We don't have that figure readily available for you. As you mentioned, it does include a variety of both small shop as well as larger format leases. including some deals that are sitting in our redevelopment pipeline. Bear in mind, for instance, we have a single tenant credit for Google and one Westside campus, which is a component of that number as well. So we do have some redevelopment leasing, pre-leasing that's already in that number, but we don't have a rental impact number to disclose to you at this time.

We'll take our next question. No, please go ahead.

Yeah, sorry. If I can ask a little bit more on the outlook. As you guys look at recovering 19-level occupancy, obviously we're sort of at the trough right now. Can you give any more color on when you think it will be, you know, end of 22 or something in that neighborhood when we can expect to get back to pre-COVID level occupancy?

Well, Floris, if we look back on our progression post great financial crisis, that was about three years from when we started at 89% coming out of the GFC to when we got full occupancy of about 94%. And based on the leasing environment today, I think we're probably going to do better than that. So I would expect by the third quarter of 2023, we'll probably be back to the 93%, 94% level.

And we'll take our next question from Katie McConnell from Citi.

Great, thank you. I was wondering if you could walk us through your expectations for land sale income and the retailer investment gains that we potentially see in the back half of the year, just given how impactful they were to date. And are there any other offsetting items to guidance that you can highlight that could be headlines in the second half of the year?

Hey, Katie. This is Scott. Good morning. We do have some additional transactions for the balance of the year that are in our thinking. These are deals that are under contract. I expect them to be less impactful than the year-to-date impact, but we probably have, if I had to, circle a number, maybe $0.03 or so of impact for the balance of the year, $0.03, $0.04, something like that. I went into great detail to talk about the quarter because, admittedly, there were a lot of moving pieces. We do expect, again, just to emphasize what I underscored again 10 minutes ago and what I mentioned the last couple quarters, we do expect strong double-digit growth in the second half of the year. I mentioned that In February, I mentioned it again in May, and here we are in August, I'm mentioning it again. So I think that speaks to our conviction about the operating environment. We saw what frankly was a stronger recovery in the second quarter to line items like percentage rent, driven by the robust sales growth we've seen in the second quarter, and to our common area. And I think that's going to help us to feel really, really strong growth in the second half of the year. I did call out some of the line items that could be non-recurring. I mentioned the investment earnings that we have in our unconsolidated line item. We are not carrying any of those further into the second half of the year. But look, it's very possible that we could continue to see some earnings accretion from those investments. It's just not captured in our guidance at this point. So I really think it's about operating performance in the second half of the year, and we feel very good and very strong and very bullish about that.

And our next question comes from Lindy Tsai from Jefferies. Hi.

What's the average lease term for the portfolio versus a year ago?

Yeah, Linda, I don't have the figures quite in front of me. I'd say it could have ticked down nominally, but generally we're talking about six to six and a half years. When I say tick down anomaly, maybe it went from high sixes to low sixes, and that's a function of, as we mentioned in the past, as we're transacting with tenants, if we didn't feel we were accomplishing what we thought was representative of full market, we may have gone shorter in duration, but that's not necessarily the rule. I'd characterize that more as the exception. Doug?

I agree with you, Scott, on that. Yes.

Thank you. And then realizing you're still in a recovery period, what percentage of leasing is temporary versus a year ago and then maybe versus the March quarter?

Yeah, temporary occupancy ticked up, I think, 20, 30 basis points. Linda, I think that will continue to tick up as the year progresses. We may get into the high sixes or 7% range in terms of temporary occupancy, which is Again, we've seen the volumes coming from our local merchants really bounce back quite well, much better than we thought it was going to be in December of last year, January of this year. So I think we'll see that tick up. And then we've got maximum flexibility to relocate those tenants and put in permanent tenants. And given the volumes we're seeing on the permanent pipeline, I feel very good about our opportunity to replace that temporary occupancy with permanent very soon.

Our next question comes from Greg McGinnis from Scotiabank.

Hey, thanks for taking the question. I'm just thinking about the full-year guidance, which seems to imply Q3 and Q4 FFO per share of 43 cents, which is down from 59 this quarter. So I assume the valuation adjustments for retail investments is non-recurring, and then there's that additional 3%. of dilution from the ATM issuances, but what are the other items we should consider going into the back half of the year?

Yeah, Greg, I think you touched on a few of them right there. Obviously, the equity we've issued to date is going to, excuse me, dilute our share count for the balance of the year, so you're going to have that impact for the second half. The investment income that we've recognized I just mentioned to Katie that we are not building any of that into our thinking as we go forward. It's very possible, given the IPO activity with some of those retailers and the investment from special purpose acquisition companies that we've seen, you know, coming through venture capital invested firms, that we could see some growth there, but it's not in our thinking. So, you know, the first half has been waited for. things like that investment income. And as I mentioned, land sales were a little bit heavier in the first half than they'll likely be in the second half. So those are all the factors I think we've already touched on.

Okay. Thanks, Lynn. Doug, I'd like to touch on leasing as well and trying to dig into that leading indicator on Q2 leasing. I was curious what spreads leases are being signed at most recently, and if there's been any change in the types of leases tenants are signing, as it appears that peers are starting to rely on percent rent leases more and more.

I'll touch on the latter, Scott. I'll let you take the spread portion of it, but what I would say is the the leases that we're doing right now are a combination of short, short-term leases and long-term leases. You know, um, like we've talked about in the past and sort of taking a chapter out of what we did coming out of the great financial crisis. Um, if our goal is to maintain occupancy and we believe we're leasing a space at what we believe is below market, um, we're doing it on a short-term basis and we'll come back in 18 months or two years and, uh, and do it again when the climate is better and people have a better outlook on where we're going. The second part of the question was percentage rent, variable rent. Like short-term deals, if one of our goals is to preserve occupancy and we are forced to take less rent, we will decrease the breakpoint. and increase our percentage of pay so that what we don't capture from a fixed standpoint, we are going to capture from a variable standpoint. But I would say that is the exception, not the rule, although all of our leases or the vast majority of our leases do have percentage rent, but they're based on a traditional market-based fixed rent. Scott, do you want to take a crack at the spreads?

Yeah, I'm not quite sure I caught the spread question. Perhaps you can repeat that, Craig.

Yeah, it's just in trying to understand, you know, we get the kind of trailing look, but I'm just hoping to get more of a leading, that leading indicator look and try and understand kind of what the most current leases are being signed at, you know, whether or not retailers are kind of feeling stronger, feeling better about signing leases today and if spreads are reflecting that.

Yeah, I think probably the thing to point to, again, is the volumes. We've spoken to the amount of signed deals as well as the deals that are being negotiated that are in the pipeline, which speak really to the willingness of the retailers to step up, not only step up in terms of renewing, but also step up in terms of opening up new stores, spending capital, which is a great refresh of all of our storefronts at our properties. So, They're very willing from a spread standpoint. You know, our spreads include the impact of those deals. What our spreads don't include is the impact of some of these short-term rental reductions, you know, to the extent during COVID or within the last three to six months, we've been granting some short-term relief for a few months or a couple quarters. That's not reflected in our spreads. Our spreads are intended to show our long-term leasing business, both from renewal and new stores.

Scott, I'll jump in on this one at this point. The spreads are improving. We're showing basically break-even spreads for the trailing 12, but included in that is for the second quarter, we had positive releasing spreads at double-digit percentage increases. It went from a pretty tough situation in the third and fourth quarter of last year to very positive now that we're in the first and second quarter. There's much more of a balance between rate in occupancy than there was at the end of 2020. It's hard to predict going forward, but certainly what we've seen in the first and second quarter is far better than what we saw in the second half of 2020. I think if you take Doug's words to heart, you'll extrapolate that to be very positive for the second half of this year.

We'll take a question from Rich Hill with Morgan Stanley.

Hey, good morning, guys. I'm sure I've missed it in the past, but I was hoping to maybe hear a little bit more about this retailer investment where you had the valuation gain. What is that and how should we think about that going forward?

Rich, it's an investment that we made starting about five years ago through a venture capital firm. And it really was an investment we did to uh, help us gain access to the digitally native brands as they emerged. I mean, there were hundreds and hundreds of them and, uh, the VC firm does a pretty good job of evaluating, um, the prospects to, to not only grow and be, you know, of increased value, but also, um, what might work well in our portfolio. So it gave us good access to a lot of the digitally native brands early on and continues to. And, um, you know, a lot of those, uh, Emerging companies today are finding good access to capital. They're growing. They're merging into SPACs. They're doing IPOs, and that's what's causing some of the positive mark to market there. But it's an investment we've had for the last five years through a venture capital firm.

That's helpful, Tom. And I guess that tees me up for my next question. Obviously, the retailers have done really well recently. There's an S1 out there for at least one company that's acquired some retailers recently at a big valuation range. Do you think there's more valuation gains to come on that? I know you can't predict the future, but is that 9 cents all of it, or should we expect some more going forward?

It's really hard to predict that, Rich. I think the good leasing environment is going to benefit a lot of these companies, but I wouldn't want to factor any more gains into our guidance for the year. When they happen, it's great and we take advantage of it, but it's pretty hard to predict.

Got it. And just one more quick question, if I may. I noticed the lease termination income went up in your guide. How should we think about that relative to the occupancy? I know you noted that it's increasing and you expect it to continue to increase. I think you put a 3Q23 number out there. But how should we think about that relative to the increase in the lease termination income?

Yeah, sure, Rich. As you can imagine, losing, you know, 4% plus of our occupancy, you know, we had certain tenants that do have credit and we're going to negotiate termination settlements. So anytime you're You see an occupancy volatile environment. You see a pickup in the termination income. Those are very tightly correlated. So I don't think this is any different than what we've seen in the past. Certainly coming out of the global financial crisis, we experienced some elevated termination income. So that's really what we see. For the most part, it's embedded within our occupancy numbers today. But we're still continuing to negotiate those settlement outcomes. And we can't book it. We can't recognize revenue until we actually sign the agreement. So... The revenue will follow later.

And we'll move on to a question from Alexander Goldfarb with Piper Sandler.

Oh, hey, good morning. Two questions, so just two questions. First question is, on the rent spread, what would the all-in trailing 12 be if you include, you know, all the COVID impacts? And then also as part of that, is your rent spread just a 12-month look back, or is it, you know, vacant space as long as it's been vacant?

Yeah, Alex, I hope you're driving safely. But, yeah, to answer your questions, the spreads don't include the COVID workout adjustments. We don't calculate it. That way we frankly never included rental reductions, so I don't have that measurement for you. Our spreads are really focused on more go-forward business in terms of renewals and new deals, not the short-term negotiations we've been doing. But, you know, I'll direct you to our average base rent in terms of the impact of that. And the second part of your question, I'm sorry, maybe you can repeat that provided you're driving safely.

I always drive safely. Is your rent threat metric just based on a 12-month look back? meaning space that was vacant 12 months ago or space as long as it's been vacant?

It's a 12-month look back.

Okay. And then the second question is, on the refinancings, do you anticipate that next year they will be full long-term refinancings, or do you think that next year we'll see continuation of short-term extensions on the loans?

I think the majority of them will probably be long-term financings. We'll pick and choose the term, but I think they'll range between 5 to 10 years, just depending upon the credit markets at that time. We may do an extension or two, but I think for the most part, they'll be refinancings, Alex.

And our next question comes from Mike Muller with J.P. Morgan.

Yeah, just a quick one here. I was wondering how close is your parking and business development income relative to pre-COVID levels?

Yeah, I expect we'll get back to pre-COVID levels by next year. We're not quite there, but it's bounced back quite well. But 2022, we'll probably get back to par pre-COVID on both those line items.

Got it. So if we're looking at this $13 million for this quarter, would you say that's 75% of the way there, half, which is a rough magnitude?

Better than half. Better than half. There's a little bit more to do on a run rate basis, but again, I do think by the time we get to the first half of next year, we'll probably on a run rate basis be within spitting distance of where we were pre-COVID, Mike. Got it.

Okay. Thank you.

Our next question comes from Keebin Kim from Truist.

Thanks. A couple quick ones here. What is the renewal rate for your portfolio today and how is that trended?

Devin, I'm sorry. Could you repeat that? You said what is the leasing rate today? Renewal rate.

The lease renewal rate.

Oh, the percentage of tenants that are renewing?

Mm-hmm. Yeah.

It's Doug, yeah. I said in my remarks that in 2021, we have commitments, meaning signed leases or leases that we're negotiating on 81% of the expiring square footage. And the remaining 19% is in the letter of intent stage.

Okay. And any sense... Can you provide some color on what your economic occupancy is today versus defined occupancy? Just trying to grasp what the embedded upside is in your portfolio.

Yeah, our leased occupancy always exceeds physical by roughly 2% to 3%. I don't think that's too dissimilar. It was probably less... in the middle of COVID last year because the deal flow slowed down, but I'd say we're probably in that 3% range right now.

And we'll take a question from Caitlin Burrows from Goldman Sachs.

Hi there. Just as a follow-up on one of the balance sheet questions, you guys had a March presentation that referenced an assumption of $700 million of equity in 21 and then 300 million in 22. You've surpassed the 21 amount already. So just wondering if you can give some detail on what's driving your decision of how much equity to issue and when, maybe the metrics that you're looking at and whether that 2022 issuance reference in the March presentation is still relevant.

Caitlin, that was a generic placeholder in a three-year forecast that Scott was using to illustrate deleveraging. So that was not a hardwired assumption. We've been fairly active on the ATM. It's going to be dependent upon the share price, whether we use it again this year or not. And it remains to be seen whether we'll do equity again in 2022. So those are just some generic assumptions that he'd put into a

slide to illustrate deleveraging okay got it and then maybe just another one on leasing spreads but hopefully asked differently enough that it might still be interesting but so the reported trailing 12 months number was about flat you mentioned earlier that in the most recent quarter they were actually up double digits but I would assume correct me if I'm wrong that more leasing is getting done at some of the better properties so just wondering if you could quantify what in place rents are for the properties that you might have historically classified as group one and group two versus the in place first market for the kind of group three to group five properties.

Well, I think we've seen good leasing demand across the board, across the whole portfolio. So we don't really take a look at spreads based on, you know, whether they rank in the top 10 or the bottom 10. We've seen pretty good activity across the board. I think that the big illustration is just the difference between what it looked like in the second half of 2020 and what it's looked like in the first half of 21. Typically, you're going to get some pricing power. And I would not say that we had that at all in 2020, quite the contrary. But it does appear as if we're picking up some pricing power in 2021 now based on demand and the leasing activity we've seen to date.

And that does conclude the Q&A session for today. I would like to turn the conference back over to our speakers for any concluding remarks.

Great. Thank you. We'll thank all of you for joining us today, and we look forward to reporting good results in the balance of the year.

And once again, ladies and gentlemen, that does conclude today's conference. We appreciate your participation today.