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spk09: We stand by. We're about to begin. Good day and welcome to the Maysearch Company third quarter 2021 earnings conference call. Today's call is being recorded. And now at this time, I'd like to turn the conference over to Samantha Greening, Director of Investor Relations. Please go ahead, ma'am.
spk12: Thank you for joining us on our third quarter 2021 earnings call. During the course of the call, we will be making certain statements that may be deemed forward-looking within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995. including statements regarding projections, plans, or future expectations. Actual results may differ materially due to a variety of risks and uncertainties set forth in today's press release and our SEC filings, including the adverse impact of the novel coronavirus, 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 on the Investors section of the company's website at macerich.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'd like to turn the call over to Tom.
spk08: Thank you, Samantha, and thanks to all of you for joining us today. After navigating almost two full years battling the impact of COVID, we're very pleased to report an outstanding quarter with almost no COVID-related restrictions in place. As you read in our 8K this morning, we had a very strong operating quarter, and we're pleased to report excellent results. We are seeing huge retailer demand. Our shoppers have come roaring back as the U.S. consumers are continuing to shop with a purpose, and we see a higher capture rate than pre-COVID. Sales are exceeding pre-COVID levels with double-digit gains the past two quarters compared to 2019, and that momentum is carrying into the fourth quarter. Retailer demand is at a level we have not seen since 2015. We expect traffic to continue to increase. The current level is over 95% of the 2019 traffic levels. Some of the second quarter highlights include, on a sequential quarter basis, we had occupancy gains of 90 basis points, and that's on top of the 90 basis point gain we had in the second quarter. At quarter end, our occupancy was 90.3%. We have a ways to go there, but we're making great progress. We saw robust leasing volumes for the quarter and year to date, both were in excess of 2019 levels. Year-to-date, we've executed leases for over 3 million square feet of space, and that compares very favorable to a full-year 2019 level of 3.3 million square feet and a full-year 2015 level of 3.4 million square feet. Once we include the fourth quarter, our full-year 2021 leasing volumes will exceed not only 2019 but the prior high of 2015. We saw same-center NOI growth of 21% in the quarter, and expect the fourth quarter to continue with the double-digit growth we've seen in the past two quarters. We were obviously optimistic about the fourth quarter as we raised the FFO guidance midpoint range to 196, a 3% increase on top of the increase in guidance last quarter. The depth and breadth of the leasing demand has us very optimistic about the future. Some of the larger deals recently signed include Target, which is at King's Plaza replacing JCPenney, Shields All Sports Megastore replacing Nordstrom and Chandler, Primark at Fashion District of Philadelphia, Primark at Green Acres, Pinstripes at Broadway Plaza, and Lifetime Fitness at Broadway Plaza and Scottsdale Fashion Square. And that's just to name a few of the bigger deals. Doug will comment in detail shortly on more of the third quarter leasing activity. In addition to the big box deals, non-traditional mall retail demand in smaller format continues to accelerate with the digitally native brands getting active again on brick and mortar locations after stepping back during COVID. Other interesting additions include a host of new electric car companies taking space in many of our malls, including Polestar and Lucid. Many of our traditional retailers are back with even greater demand for space than pre-pandemic. With retailer bankruptcies down to a record low level and demand for space very strong, this is an excellent leasing environment, which we expect to carry into 2022. Although leasing spreads were down slightly, we expect that trend to reverse itself in the upcoming quarters. During the quarter, we also continued our strategy of selling non-core assets. During the quarter, we sold La Cantata, a lifestyle center in Tucson, Arizona. We generated net cash of $100 million The open-air 246,000-square-foot center sold for $165 million gross. That transaction builds on the March 2021 sale of Paradise Valley Mall, another non-core asset in Phoenix, which yielded net proceeds to Maastricht of $95 million. The cash proceeds from both of those sales were used to reduce debt. The balance sheet moves we've made in 2021 have significantly improved our leverage metrics. Year-to-date, we've paid down debt of over $1.5 billion and reduced net debt to EBITDA by over two full turns and dropped debt-to-market capitalization to 61%. We're very optimistic about our business as we move through the balance of the year and into 2022. Not only is the leasing environment strong and getting better by the month, but we expect significant gains in occupancy, net operating income, and cash flow. And now I'll turn it over to Scott to discuss in more detail the financial results for the quarter.
spk02: Thank you, Tom. Now on to the highlights of the financial results for the quarter. We posted extremely strong operating results in the third quarter, with Same Center NOI increasing 21.4% relative to the third quarter of 2020, including lease termination income. And if we were to exclude lease termination income, Same Center NOI still increased 20.6%. Funds from operations for the third quarter of 2021 was 18 million or 22% higher than the third quarter of 2020. FFO per share for the quarter was 45 cents. This was two cents or 5% higher than consensus estimates of 43 cents per share and represents a seven cent decline from the third quarter of 2020 at 52 cents per share. EBITDA margin has increased 1.2% from 57.5% at the third quarter of 2020 to 58.7% at the end of the third quarter of 2021. As Doug will soon explain, our portfolio occupancy continued to increase in the quarter and is up nearly 2% over the past two quarters given the extremely robust and resilient leasing volumes generated by our high-quality leasing team and real estate portfolio. This is a very strong earnings quarter. Primary factors contributing to these NOI and FFO gains are as follows on the NOI front. One, the quarter included a $15 million or $0.07 increase in percentage rents, resulting from the dramatic increase in sales that we reported earlier today and that Doug will soon expand upon. Two, bad debt expense represents a comparative $15 million or $0.07 improvement quarter over quarter. And three, Common area income has contributed another four cents of NOI and FFO, including from our urban parking garages. Consistent with what we reported last quarter, our common area business has proven to be quite elastic and resilient and is exceeding our early 2021 expectations. Offsetting these NOI factors were shopping center expenses increased by $8 million, or four cents, This was driven by the closure or partial closure of many of our town centers during the third quarter of last year, relative to the full operational status of our portfolio throughout the third quarter of 2021. And lastly, a few other factors included one decrease in straight line of rental income of 10 million or four cents as a result of significantly reduced abated rent and the third quarter of 2021 relative to the third quarter of 2020. Two, the third quarter was lower due to land sale transactional timing and included a decrease in land sale gains totaling $12 million or 5 cents. And then three, the third quarter included a decrease of approximately 12 cents in FFO per share, resulting from increased share count due to common stock sold earlier this year through our ATM programs offset by decreased quarterly interest expense from significant debt pay downs in 2021 as a result. This morning, we updated our previously issued 2021 guidance for FFO. 2021 FFO is now estimated in the range of 192 to $2 per share, which represents a 6 cent or 3% increase versus the midpoint of our previously issued FFO guidance range. While certain guidance assumptions are provided within our supplemental filing from earlier this morning, here are some further anecdotes. This increased guidance is reflective of an operating environment that is improving better and faster than our prior expectations and is due to increases in same center NOI. This guidance range assumes no further mandated shutdowns of our retail properties and it assumes only the previously reported $848 million issuance of common stock with no further issuance of common equity through the balance of this year. As I mentioned during the previous two quarterly calls, we anticipated strong double-digit NOI growth in the second half of 2021. In fact, that is now playing out, and we expect strong same-center growth in the fourth quarter, likely surpassing the levels we just reported on for the third quarter of 2021. More details of the guidance assumptions are included on page 18 of the company's Form 8 supplemental financial information. And onto the balance sheet. As part of our continuing commitment to deleveraging our balance sheet, in 2021, we have repaid approximately $1.5 billion of debt. In the third quarter, those efforts were buoyed by the sale of La Cantata in Tucson, Arizona, which resulted in a repayment of approximately $165 million of debt. As previously stated, we expect to generate free cash flow after payment of dividends and recurring capital expenditures exceeding $200 million per year over the next few years, which with a quickly improving operating environment supports a path to continued leverage reduction to approximately 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 only 100 million of the $525 million aggregate capacity is currently outstanding. We have approximately $610 million of liquidity today. From a secured financing standpoint, last week we closed on a five-year, $65 million refinance of the shops at Atlas Park, a lifestyle center near Queens, New York, and we are currently negotiating a commitment for a five-year, $200 million refinance of Flatiron Crossing, an enclosed regional town center in Broomfield, Colorado. In aggregate, Both loans will take out the existing loans with no incremental capital outlay. The debt capital markets continue to improve with each passing quarter, and we are very pleased with the progress addressing these near-term maturities. As we have mentioned, we continue to see positive progress within the debt capital markets with the execution of a growing number of retail deals on sequentially favorable terms. And now I will turn it over to Doug to discuss the leasing and operating environment. Thanks, Scott.
spk11: Tom and Scott did a great job of highlighting some of the leasing activity and metrics at a high level. And as Tom mentioned, I'll dive in a little bit deeper. So the leasing environment continues to improve and the leasing productivity continues to outpace pre-COVID 2019 levels. In fact, we're on track for our strongest leasing year since 2015. Sales were strong in September, and this is on top of a very productive July and August. September sales were up 17% when compared to September 2019. And once again, all categories, including food and beverage, comp positively. Looking at the quarter, third quarter sales were up 14% over third quarter 2019. And this is on top of the second quarter being up 14% versus second quarter 2019. Occupancy at the end of the third quarter was 90.3%. That's up 90 basis points from 89.4% at the end of the second quarter. As Scott mentioned, over the past six months, portfolio occupancy has increased 180 basis points relative to the 88.5% occupancy rate on March 31st, 2021. And given the healthy retail environment that exists today, coupled with our strong leasing pipeline, which we'll touch on in a moment, we anticipate that occupancy will continue to increase throughout the remainder of this year. and into 2022 and beyond. The pace of bankruptcies continues to decrease. And year to date, bankruptcies within our portfolio remain at the lowest levels we've seen since 2015. In the third quarter, only two tenants filed for bankruptcy. Within our portfolio, these two tenants accounted for just five stores and only 13,000 square feet. Trailing 12 month leasing spreads were minus 2.5%, That's down from minus 0.2% last quarter. And this is primarily a result of signing a 20-store package with one retailer, totaling just over 100,000 square feet. Average rent for the portfolio was $62.58 as of September 30, 2021. And this is an increase when compared to $62.47 as of June 30, 2021. and $62.29 as of September 30th, 2020. We continue to make great progress on our 2021 lease expirations. To date, we have commitments on 91% of our 2021 expiring square footage with another 9% or the balance in the letter of intent stage. As for our 2022 lease expirations, we have commitments on 36% of the expiring square footage and 55% in the letter of intent stage. Tenant openings. In the third quarter, we opened 280,000 square feet of new stores, resulting in total annual rent of $10.5 million. Year-to-date, we've opened 630,000 square feet of new stores, which is about 13% more square footage than we opened during the same period in 2019. Most notably, in July, we opened a spectacular 5,000-square-foot two-level flagship Dior store in the luxury wing at Scottsdale Fashion Square. Not only is Dior first to the Phoenix market, but it's also first to the state of Arizona. In fact, their closest store is 250 miles away in Las Vegas. The addition of Dior further solidifies the fact that Scottsdale is and will continue to be the premier luxury destination in all of Phoenix, or in Arizona for that matter. In September, Primark had its grand opening at Fashion District Philadelphia. Shoppers arrived early and they stayed late. Lines outside the store continued for days, and high traffic volumes remained ever since. This two-level, 46,000-square-foot store located at the corner of Market and 10th Streets is a true anchor in every sense of the word. Primark is destination-oriented and is expected to increase FDP's already strong trade area and elongate shopper dwell time. Fashion District Philadelphia marks our fourth store opening with Primark, following Danbury Fair, Freehold Raceway Mall, and Kings Plaza. In addition to these four open stores, we also have signed leases with Primark at Green Acres and Tyson's Corner that will open in 2022 and 2023, respectively. As such, we remain Primark's largest U.S. landlord and continue with ongoing discussions regarding several other key markets and opportunities. Staying in the large format category, we opened a 70,000 square foot Shoppers World at Green Acres Mall in the former Century 21 location. And this is in addition to the Shoppers World that opened last quarter at Fashion District Philadelphia, also in the former Century 21 location. So now we have both of our bankrupt Century 21 locations open and occupied. We also opened a 25,000 square foot Kids Empire at Santan Village and a 20,000 square foot Ross Dress for Less at Pacific View. Other notable openings in the third quarter include St. Laurent at Fashion Outlets of Chicago, Athleta at Danbury Fair, Rod & Gun at Broadway Plaza, and Free People Movement at Carolyn Commons. Lastly, in the digitally native and emerging brand category was active. In the third quarter, we opened Buckmason and Lucid Motors at Scottsdale Fashion Square, Marine Layer at Broadway Plaza, and two Fabletics stores at Los Cerritos, and Washington Square. Now let's look at the leases we signed in the third quarter. In the third quarter, we signed 219 leases for 1.1 million square feet, resulting in $47 million in total annual rent. In the first three quarters of 2021, we signed 707 leases for 3 million square feet, resulting in $136 million in total annual rent. This represents 10% more leases 25% more square footage, and 14% more rent than during the same pre-COVID period in 2019. Notable leases signed in the third quarter include Aritzia and a new and expanded Blue Nile store at Tyson's Corner, Brunello Cucinelli at Fashion Outlets of Chicago, Dolce & Gabbana and Marc Jacobs at Scottsdale Fashion Square, Guess Originals at Los Cerritos, and a 9,000-square-foot flagship Lululemon at Broadway Plaza. We also signed a five-store package with Windsor Fashions totaling 22,000 square feet. In the large format category, we executed a lease with Target for a three-level, 90,000-square-foot store at Kings Plaza in the former JCPenney location. Along with the lease we signed with Primark for the JCPenney location at Green Acres, We've now replaced the only two stores we lost from Penny during their bankruptcy and did so with compelling, relevant, and productive uses. We finalized our deal for 220,000 square foot Shields All Sports at Chandler Fashion. We also signed a 37,000 square foot Lifetime Fitness at Scottsdale Fashion at the entrance of our new luxury wing. And this marks our third deal with Lifetime in addition to Biltmore Fashion Park and Broadway Plaza. We also signed our first deal with Pinstripes at Broadway Plaza. For those of you who aren't familiar with Pinstripes, it's a very cool 27,000 square foot indoor-outdoor entertainment concept featuring bowling, bocce, live music, a hip bar, and great food. It'll be the first in the Bay Area and will bring vibrancy and excitement to Broadway. Lastly, in the digitally native and emerging brands category, We signed leases with Fabletics at the Village of Corte Madera, Leap at Northbridge, Polestar at Scottsdale Fashion Square, and Tonel at Santa Monica Place. Now turning to our leasing pipeline at the end of the third quarter, we had signed leases for 330,000 square feet of new stores still to open in 2021. And looking into 2022 and 2023, we've signed leases for another 1.7 million square feet of new stores still to open. And in addition to these signed leases, we're currently negotiating leases for new stores totaling 620,000 square feet, the majority of which will open in 2021 or early to mid 2022. So in total, that's over 260 signed and in-process leases totaling 2.7 million square feet for new store openings throughout the remainder of this year and into 2022 and 2023. So to conclude, Sales are trending significantly better than they were pre-COVID. Occupancy is up nearly 200 basis points over the past two quarters and is expected to continue to increase throughout the remainder of this year and into 2022. Bankruptcies are at their lowest level since 2015, and that's consistent with our significantly reduced tenant watch list. And leasing velocity is at its highest level since 2015. This is evidenced by the multitude of leases which we signed this year resulting in a very strong, vibrant, and exciting pipeline of tenants slated to open yet this year and into 2022 and 2023. And now I'll turn it over to the operator to open up the call for Q&A.
spk09: Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. We ask that you do please limit yourself to one question and one follow-up prior to reentering the queue. Once again, that's star 1 if you'd like to ask a question. We'll take our first question from Jim Sullivan with BTIG. Please go ahead.
spk06: Thank you. The First question I have, when you look at the occupancy rate gain that you've achieved through the end of the third quarter and the leasing progress you've made for deals to come, and we think back to the analogy with the prior recovery after the great financial crisis, at that time it took about six or seven years to regain the roughly 500 basis points of occupancy lost. in the GFC. Here, the vacancy loss was greater. The pace of recovery seems to be greater as well. I don't know. I'm not asking you to make a forecast here, but when you think about getting back to, say, a 94%, 95% occupancy range, can you give us some time frame? I know you've said you expect it to be quicker, but obviously it's a key driver of the portfolio, the strength of the portfolio, the EBITDA. And I just wonder if you can help us, Tom and Doug, indicate how long it's going to take to get back to that number this time.
spk08: Yeah, sure, Jim. By the way, I think after the great financial crisis, we recovered in four years, four and a half years, something like that. And we look at the pace today. You're correct. It is more rapid than what we saw in 2010 and 11. And if we stay on pace with what we've seen the last two quarters, I think by the end of 2023, we'll be back in the occupancy levels that we were at pre-COVID. Again, it depends on the pace, but everything we see ahead of us is a tremendous demand and some pretty big volume, and we think we can keep up that pace.
spk06: Okay, then the second question for me, you mentioned Primark as a notable, important big box going into several centers successfully and with more to come. And I wonder if you can just help us, you know, compare this with your, you know, the legacy department store transactions that were in the portfolio before those department stores started closing. And I know that Primark isn't necessarily taking as big a box, but help us understand kind of what kind of per foot revenues you can get from Primark versus those legacy deals, you know, obviously without disclosing the specific numbers that you may not be comfortable doing.
spk08: Yeah, I mean, Primark is new. They're a bigger version of what we've seen come over from Europe in the past. Don't take the same size as a traditional department store. They do pay more rent. The traditional department stores were notorious for not paying much rent, frankly. They were a traffic driver. And so the economics are better, and we think they're going to continue to gain momentum and continue to expand. So they're exciting. I guess our latest anecdotal evidence on that is when we opened Fashion District of Philadelphia a few weeks ago, even though the city of Philadelphia has not fully bounced back yet, there were people lined up to get in that store and a lot of traffic. Doug, you can add further and elaborate, but that's my view. It's a much different type of department store than those we've been replacing.
spk11: The only thing I would add, Tom, is that while maybe not as big as the traditional anchor stores, they do act like a traditional anchor store in the way anchor stores are supposed to be. And as I mentioned in my remarks, Primark does draw outside of our traditional trade areas. And it does elongate the shopping trip. So it really is doing what all the traditional anchor stores used to do and were intended to do. And we're thrilled to bring them over here and look forward to doing many more deals with them.
spk06: Okay, great. Thanks, guys. Thanks, Jim.
spk09: Thank you. We'll take our next question from Derek Johnston with Deutsche Bank.
spk14: Hi, everyone. Thank you. Kind of expanding on the last question. So The near term openings you've discussed or are close to announcing, you know, both Primark and others clearly backfilling various anchor closures, which are likely out of the same store pool due to length of vacancy. So can you give us an idea of the economic benefit or perhaps the mark to market you're seeing with the new leases and what annual escalators you may be getting? And then lastly, How do you see traffic trending once they're open versus, say, a Sears or a JCPenney or a Century 21, for example?
spk02: Yeah, hey, Derek. This is Scott. Good morning. You know, I would say that it really depends as to whether or not they're in the same center pool. It really depends on what's happening to the extent. We're simply replacing uses within the box as opposed to tearing down the box and doing something broader from a mixed-use perspective. Those things are in the same center pool. So for instance, a Primark substituting in for JCPenney, we would consider that to be same center. We'd pay them a tenant allowance on occasion, have a little bit of retrofit work before we deliver space. That wouldn't be considered a major development and would be included within the same center. To the extent we're tearing down a box, say Los Cerritos or Washington Square, where as you know, we're going through entitlements right now to add a mixed use appendage to the campus In those instances where there's a more heavy development spend, we're probably going to be adding GLA. That would be non-same center. In terms of, maybe you can repeat the second part of your question just so we touch on that as well.
spk14: Yeah, just the economic benefit or perhaps the mark-to-market you're seeing with the new leases, any escalators, and how you view traffic clearly improving once they're open versus the legacy boxes.
spk02: Yeah, you know, I think I just on the on the rent side and the mark to market, you know, just to expand on Tom's comments without getting specific in terms of rents, rent levels, you know, the anchors typically were paying no to very minimal rent, you know, low to mid single digit type of rent on average. So we're getting more full big box rents associated with these deals. And, you know, obviously Capital is precious, and we wouldn't be making these moves unless they made economic sense for us. So there is a very positive mark to market and a nice yield on our cost.
spk08: And then in terms of traffic, I mean, clearly replacing JCPenney and Sears with the likes of Primark, Target, and Shields, we're going to have significantly more traffic and significantly more sales. So, you know, the commerce that's generated from those boxes is going to be far greater with those new tenants compared to the ones that – you know, have vacated, including Penny and Sears. So we expect, you know, a many times multiple of sales and traffic from Primark, Target, and Shields.
spk02: And that's an important point to note. And when you think of a Shields, you think of all the space and two levels that's leading up to it. It's not only the mark to market on the, you know, the anchor box that we may be talking about on any given deal. It's really all of the re-letting over the next three years as we sell into Shields coming to the center or Primark coming to the center or Target. It makes the space around it, the inline shop space, eminently more valuable, and we're able to mark that space up.
spk14: Yeah, no, thank you. That makes sense. And my second question, the Flatiron in Colorado, can you discuss what was entitled recently and how you're thinking about the mixed-use transformation, be it experiential, residential office, coworking, whatever is being considered, and then how do you plan to approach it? And really other repositioning projects as well. Are you looking to do this solo or maybe with partners and perhaps a JV component where the structure may be a little less capital intensive but also meaningly creative? Anything you could share there would be helpful. Thank you.
spk08: Yeah, Derek, I'll discuss it kind of from a global approach, and Scott can get into some of the details on Flatiron, but Our goal is to densify and diversify our portfolio wherever we have the opportunity. A couple good examples are at Los Cerritos in Washington Square, where we're replacing Sears boxes with mixed use, and we're going through the entitlement process now. And as we go through that, we have a variety of ways to do that. We can do the capital light version, which is effectively, you know, ground lease the land to a developer, you know, residential developer or mixed-use developer. We could also contribute the land and take a partnership position based on the value of the land, or we could do a straight-up 50-50 deal. So there's a lot of different ways to approach it. It's going to depend on the individual project and the type of return on cost that we can achieve.
spk02: And Derek, on Flatiron specifically, we received entitlements to add both multifamily as well as office. You know, we do have a dark Nordstrom box they closed during COVID, and we do anticipate more than likely converting that box to creative office. The nearby Boulder market has an insatiable demand for tech use, and we think we're very well positioned about 15 miles down the road to take advantage of that demand. And on the multifamily side, we would envision much the same as Tom mentioned, you know, contributing our land into a JV and then assessing what our further economic contributions will be from there by adding, you know, a multifamily building as well as some restaurants and a sense of place, you know, picture an entertainment environment where you could hold marketing events and the like surrounded by restaurants and patios. So it would be a very attractive new entry that complements the existing property.
spk14: Thank you.
spk09: Thank you. We'll take our next question from Craig Schmidt with Bank of America.
spk05: Thank you. Given the trend of sales per square foot metric, it would seem like your absolute sales per square foot number must be returning back to pre-COVID level. I was wondering when you might start reporting the sales per square foot number as opposed to just trend. And does Macefish intend to return to showing the sales per square foot by property ranking table that you published, you know, pre-COVID?
spk08: Hi, Craig. How are you? That is a good question. The answer is still to be determined, frankly. We were the only ones in the sector that did that, so it was a little bit of a proprietary disadvantage as it related to, you know, the leasing transactions and environment. It's something we'll consider as we get on the other side of COVID here.
spk05: Okay, great. And then, I mean, we've already entered the holiday season from a November-December standpoint. It seems like the supply chain disruption narrative is starting to dissipate. What are you hearing from the retailers in terms of their concerns about having enough stock in their stores for holiday 21?
spk08: Yeah, I mean, obviously, being Southern California-based and seeing the freighters stacked up in the ocean trying to get into Los Angeles, it's a topic that comes up frequently. Our retailers seem to have been hit harder earlier by the supply chain issues. They seem to have worked their way through most of that. And to tell you the truth, Craig, we don't hear a lot of complaints from the retailers about their supply chain. It seems their bigger issue is getting an adequate labor force. and getting people rehired. That seems to be the biggest challenge for them these days as they approach the holiday season.
spk05: Thank you.
spk09: Thank you. We'll take our next question from Samir Kanaal with Evercore ISI.
spk07: Hey, good morning, Scott or Tom. Can you help us understand how to think about growth for next year from an FFO perspective? I mean, this year you had the valuation gain, plus you also had a very high term fee number, which likely won't repeat. So maybe off of a clean FFO number, how should we think about sort of the building blocks for growth? I mean, there's clearly the occupancy portion of it to pick up for next year, but is there anything else that we need to think about in terms of growth?
spk02: Good morning, Samir. You touched on a few of the points. Obviously, we'd have carryover of the share count that would anniversary through the first half of the year. We would also expect a straight line of rent, which was elevated this year because of abatements and concessions that we gave to tenants in the first half of 2021. We'd expect that to be substantially lower. Obviously, that's non-cash. But on the positive side, we certainly would expect an increase in operating cash flow Without giving any guidance, we do expect strong in a wide growth into next year. I don't think it's going to be 20% that we reported in the third quarter, but we do expect it to be strong and we do expect cash flow growth.
spk07: And I guess on the occupancy portion, is there a number that your guys are sort of targeting or you can sort of throw out in terms of where you think occupancy could kind of, you know, end? sort of year end for this year and maybe how you're thinking about next year?
spk08: Well, again, as I said earlier, it depends on the pace. The last two quarters, both quarters have been up 90 basis points. So if you assume we achieve that in the fourth quarter, although fourth quarter leasing tends to slow a little bit because the retailers are trying to get open for the holidays and they're moving into the last fiscal quarter of their year. But it wouldn't be out of the question to get to, you know, close to 91% by year end. We're at 90.3 now. So that could even, you know, we could taper off a little bit from the last two quarters pace and still get there. And then, you know, next year we think the leasing pace is going to continue. So, you know, I think you could see us seeing some good pickup next year as well and getting, you know, into the 90, you know, 92 to 93% range by the end of 2022. Great. Thanks for that, Tom.
spk09: Thank you. We'll take our next question from with Compass Point.
spk10: Hey, thanks for taking my question, guys. I had a question on the leasing environment. Clearly, you guys are big beneficiaries. Your percentage overage rent was very, very high, as you mentioned, $15 million. As we think about next year as well, what percentage of your current portfolio is temp tenants? And how do you think about your specialty leasing, particularly going into the holiday season and going into next year when presumably last year there was very little of that in your numbers?
spk08: Yeah, especially leasing. That's a pretty broad category. It would include advertising. It would include anything that's not long-term traditional leasing. And it makes up, at any point in time, 10% to 15% of our NOI. And I relate it to NOI rather than top-line revenue because most of that drops right to the bottom line. And we did a pretty good job of getting vacant space filled very quickly when we got the bankruptcies in 2020. And so as we continue to do more permanent leasing and the overall occupancy level goes up, the permanent percentage lease goes up, there's going to be less inventory for the specialty leasing folks. So I would expect that to actually taper off a little bit. It'll be strong in the fourth quarter. We've done a good job releasing that space, but I think a lot of that space will move from being temporary space to permanent space in 2022. And so I would expect that the pace of growth with business development or especially leasing to taper off.
spk10: And sort of where are you in temp occupancy today versus where you are normally? How much more upside is there in converting that into perm tenancies?
spk02: Yeah, Flores. Good morning, Scott. We're in the mid 6% range on occupancy right now on temp basis. As Tom mentioned, I would think that that will take up closer to seven by the end of the year. But given the demand we're seeing, I do expect that that will start to subside as we move forward into 2022. We'll start to convert some of that temp occupancy to perm occupancy. It's an important driver for us, of course. You know, the temp rents are typically 35%, 40% of what a full-time permanent tenant would pay. As we affectionately say, Doug's job and Doug's team's job is to put the specialty leasing group out of business. I'm not saying we're going to eliminate specialty leasing, but we affectionately say, you know, our ultimate goal is to have more permanent leasing. And, look, given the volume that we're seeing, I think we're headed in that direction as we move into 22 and 23. Okay.
spk10: Great. And if I may have one follow-up question as well, I noticed your lease spreads. There's a difference between your GV assets and your consolidated assets. And I'm curious, obviously, the overall spread was marginally negative for the quarter. But what was driving that? Are there any anomalies behind that? And does that partly have to do with you taking more percentage rent in some instances? Or maybe if you can give us some more color on that, that would be helpful.
spk08: I mean, that can fluctuate quarter to quarter depending on what leases are expiring and what new deals get done. So it can vary quite a bit. Historically, we've always had bigger releasing spreads in the JV assets, and that's because a lot of our bigger assets tend to be JV'd. If you think Tysons, for example, Scottsdale Fashion Square, some of those type assets that have very high sales per foot are JVs. And historically, that's been the case. And I think we'll continue to probably see that the case.
spk10: Thanks, guys.
spk09: Thank you. We'll hear next from Rich Hall with Morgan Stanley.
spk15: Hey, guys. Good morning. I was hoping you could help us maybe bridge the 2.5%, negative 2.5% leasing spreads disclosed in the prepared remarks to the average base rent per square foot in the supplemental. If I'm just looking at the delta on executed versus expired leases, it looks like it's more negative than the negative 2.5. So maybe just a bridge to help us understand those two numbers.
spk02: Yeah, sure, Rich. You know, average base rent includes the entire population, all leases. The leasing spread is a metric that compares for leases that are over 12 months. It compares the new rent, new base rent relative to expiring rent over the last 12 months. And so it's not a same center metric. So I don't think you can necessarily derive a real clean comparison between average base rent, again, which is over the entire population. versus, you know, which, of course, that entire population would have just grown relative to last year based on fixed increases. I don't think you can compare that to just a 12-month sample. Again, that 12-month sample excluding renewals that were less than 12 months. Okay, that's helpful.
spk15: You know, that's helpful. The reason I was asking is one of your peers noted that their leasing spreads We're not the same store, so I just wanted to make sure I understood that. The second question I had was about overage rents. I'm not super sure how these are structured, so I was hoping you could give us some more insights, and specifically, let's say sales stay at these robust levels but don't accelerate. Does your percentage rent stay the same next year, or does the threshold step up and maybe lead to lower percentage rents? I'm just not sure how they're structured, so I'd love some insights on that.
spk02: Sure. Assuming constant sales going forward, you'll naturally see a tick down of percentage rent as we convert that into fixed rent as leases roll. Again, we can only access a certain portion of leases in any given year. But assuming constant sales, you would see that tick down. In terms of what's driving it, look, the elevated sales are causing just a larger swath of tenants to ultimately break Yes, there's a little bit of this associated with some of the COVID modifications that we did, but really, as we look at it, it's really just there's a lot more tenants breaking. I mean, you have some tenants that are really, really outperforming at a level that we wouldn't have anticipated and are now paying percentage rent.
spk08: That being said, there's a very small percentage of our overall tenant base that pays percentage rent. Rich, I think it's less than 10% of our tenants pay percentage rent, so... It's a relatively small base, but, you know, when you're up as much as we've been up the last couple quarters, you push a fair number of tenants into percentage rent that weren't there in 2019 and certainly not there in 2020.
spk15: Yeah, that's helpful, guys, because you just nailed the heart of my question, because the percentage rents are up a lot versus 2019. So that additional disclosure is helpful. Thanks, guys. Thanks, Richard.
spk09: Thank you. We'll hear next from Linda Tsai with Jefferies.
spk01: Hi. You discussed earlier that electric car companies like Polestar are opening at your properties. Does this have the potential to significantly increase the sales productivity of your malls like Tesla did? And then how many electric car company leases do you have across your portfolio currently?
spk08: So that's a really good question, Linda, and we don't know yet. And I'm not sure they know yet either in terms of the sales. They're pretty exciting. They're an interesting product. We probably have five different brands that we've done deals with. I think we've got about 20 leases in place, and that includes a handful of Teslas. But there's quite a bit of demand, and we've seen them come in. For example, at Corte Madera, we had a Polestar that came in on a temporary basis, and they had such a good response from the consumer that they went fairly quickly into a permanent space. And I think we're going to see more and more examples of that. And it's great. It brings traffic. It brings interest. It brings diversity to the tenant mix. And we're kind of excited about it, frankly. In terms of what kind of sales they do, remains to be seen. But I think it's a direction, you know, the whole country's going, frankly, is to more electric vehicles. And some of these are fairly well-sponsored. In one case, Volvo is part owner of one of the companies in California. They've got a fair amount of capital behind them at this point.
spk01: Can you remind us how many EV charging stations you have across your portfolio?
spk02: We have charging stations now at a vast majority. I'll say 95% of our parking fields at our properties do have charging stations.
spk01: Got it. And then regarding the 20-store package that impacted releasing spreads, it sounds like it's a pretty significant deal. are there any more details you could provide? Like, is this a new type of retailer, or is it a legacy? Or any details on where they might be opening?
spk02: It's an existing retailer that we've had for probably the better part of 10 to 15 years, and they're using this as an opportunity to expand their fleet, you know, recognizing that there's a lot of high-quality space out there. You know, we were able to accomplish a deal that, probably added 40, 50 basis points of occupancy. But beyond that, we really obviously can't get into names and specifics.
spk01: Thanks. And then last quarter you highlighted rent abatement. Were there any rent abatements this quarter?
spk02: Very negligible, Linda. I'm pleased to say that, you know, the COVID negotiations are behind us. That's a very positive thing. So they were very small.
spk01: Thank you.
spk09: Thank you. We'll take the next question from Mike Mueller with JP Morgan.
spk03: Yeah, hi. For the 180 basis points occupancy increase you've seen, how varied was that across geography and asset productivity?
spk02: It was... It was across the board. I mean, you know, when you're talking about, let's say we have 45 assets, if you're talking about the bottom 15, obviously there was less New Deal activity there than there was in the top 30. But relative to our better assets, it was really across the board in terms of geography and productivity. And not only across the board, it's been across the board in terms of size, in terms of diversity of category. Doug, do you want to expand?
spk11: Now, Scott, I think you're right on, and that's really why this business is so exciting right now, and I think it's one of the reasons, you know, Tom's point earlier, why we may drive occupancy quicker than we did in coming out of the great financial crisis because of the breadth of uses that we have. I mean, we're not talking about traditional retail anymore, although we are still leasing to traditional retail, but when you start layering in entertainment and home furnishings and food and beverage and grocery, for that matter, you're going to see occupancy rebound a lot quicker, but probably as importantly, you're going to see our shopping centers transition from traditional malls into town centers, and that's really our goal, to be everything for everybody.
spk03: Got it. Okay. That was it. Thank you. Thanks, Mike. Thanks, Mike.
spk09: Thank you. We'll hear next from Greg McGinnis with Scotiabank.
spk04: Hey, everyone. Thanks for taking the questions. Just a couple quick ones from me. First, how does average ABR sign or the portfolio average base rent account for the percent rent leases?
spk02: It does not. Average base rent just factors in average base rent. It doesn't factor in percentage rent. So, you know, if we were to, for instance, include percentage rent, obviously it would be up relative to this time last year just because of the increases we've reported on. And similarly, the leasing spreads would likely show a little bit of improvement as well. We haven't quantified that, but it does not include any percentage rent.
spk04: Okay. But it is including the base rent portion of those lease signings?
spk03: Correct.
spk04: Okay. All right. Thank you. That's helpful. And then Doug, appreciate the color on the 2021 lease expirations. Just curious what the retention rate has been on expiring leases, how that compares to historical averages. And then for the 2.7 million square foot lease pipeline that you guys have, how much of that GLA relates to space that is currently occupied versus vacant?
spk08: So I think, Greg, your question was what percentage of the deals that we're quoting are renewals versus new deals?
spk04: Well, it's more just understanding for the expirations that you did have. Sorry, for the 2021 expirations, how much of that was they stayed on, right, or left the portfolio? And then for the lease pipeline, how much of that is going into currently occupied space?
spk11: Hey, it's Doug. I don't think we have the exact breakdown, but it is definitely a combination of renewing expiring leases and then backfilling expiring leases with new leases.
spk08: It's historically been about 65% renewals, 35% new. Might be a little bit higher coming out of COVID as a result of the rash of bankruptcies, but typically that's what it's been, roughly one-third, two-thirds.
spk11: And I would say that number is probably a little bit higher when you look at the pipeline, just because if you think about the pipeline, we're talking about leases that are opening in the end of 21 or the beginning or mid 2022. And in order to do that, you need to have vacant spaces. So I would say that skews higher towards vacancies than it does expiring leases.
spk02: And to the second part of your question, Greg, you asked about, I think it was leased versus physical. You know, we're about 2% to 3% of the leased or economic occupancy is not yet in place. And so there's always, you know, a trailing impact of about a nine-month, six- to nine-month build-out space for our typical inline space. And so some of that occupancy will not start to pay rent and will not start to see the cash flow benefit until next year. So there's always that lagging effect. It's about 2% to 3%, though.
spk04: Okay, great. Thank you so much.
spk02: Sure, thanks.
spk09: Thank you. We'll hear next from Katie McDonnell with the city.
spk13: Great, thank you. Can you help us understand the bridge from 3Q SFO to the implied 4Q level, which usually sees a larger pickup from the holidays? So are there any other factors to be aware of within 3Q that may not be very occurring?
spk02: Yeah, sure. Good morning, Katie. Yeah, you know, at the midpoint of our guidance, we'd be slightly ahead in the fourth quarter relative to the third quarter. As you can see, we've provided a pretty broad range, and the broadness of that range really relates directly to what could happen in the fourth quarter relative to sales. If sales continue at the current trends, we could end up higher than the midpoint towards the upper end of our range. We think we've made some realistic sales estimates that are embedded within the midpoint, but it's very possible we could end up higher than our midpoint if sales continue at the current pace. Keep in mind that in the third quarter, lease termination income was elevated relative to where we think it's going to end up in the fourth quarter, so that's another factor. And then, you know, the seasonal nature of our business, the third quarter is not like the fourth quarter, which is more expensive to operate our shopping centers. We've got expanded holiday hours, expanded staffing, so that means more housekeeping and maintenance staff, security staff, some cases utilities and things like snow removal. It just becomes a more expensive business to run in the fourth quarter given the seasonal nature of it. So those are some of the other factors that you should keep in mind.
spk13: And to the point on expenses, can you talk about your outlook for reimbursements since the recovery rate is still trending below average relative to the OPEX improvements to date or increases? Is that a function of how leases are being structured today or would you expect to see more of an improvement next year?
spk08: Yeah, part of that, Katie, is just going to trend with the occupancy level. We switched to fixed cam a number of years ago, and so when occupancy drops, reimbursements are going to drop almost pro rata, and we expect that to come back as we fill up more space and get closer to our more normal level of 93%, 94% occupancy. Okay, great. Thanks. Thank you.
spk09: Thank you. And that does conclude today's question and answer session. I'd like to turn the conference back over to Tom for any additional closing remarks.
spk08: Thank you, Cody. We'll thank all of you for joining us today. We look forward to reporting the balance of the year and seeing many of you at NARIT next week.
spk09: Thank you. And that does conclude today's conference. We do thank you all for your participation, and you may now disconnect.
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