Macerich Company (The)

Stand by, we're about to begin. Good day and welcome to the Mace Rich Company fourth quarter 2021 earnings call. Today's conference is being recorded. Please be advised that this call is scheduled for one hour. We ask that you limit your questions to one question and one follow-up question. At this time, I would like to turn the conference over to Samantha Greening, Director of Investor Relations. Please go ahead.

Thank you for joining us on our fourth quarter 2021 earnings call. During the course of this call, we'll be making certain statements that may be deemed forward-looking within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995, including statements regarding projections, plans, or future expectations. Actual results may differ materially due to a variety of risks and uncertainties set forth in today's press release and our SEC filings. including the adverse impact of the novel coronavirus 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 turn the call over to Tom.

Thank you, Samantha, and thanks to all of you for joining us today. We're pleased to report an outstanding quarter with virtually all of our operating metrics trending very positively. After battling through a very tough 2020, To see the results we've achieved in 21 is a testament to our team and the quality of our portfolio. We continue to see very significant and accelerating retailer and mixed use demand. Our shoppers have come roaring back to our centers to shop with a purpose. We see a higher capture rate than pre-COVID with traffic at about 95% of fourth quarter 2019 traffic, but with tenant sales exceeding the 2019 levels. In the fourth quarter, we again saw double digit tenant sales gains, and that's three quarters in a row compared to 2019. Retailer demand is at a level we have not seen since 2015. During 2021, we signed more leases in terms of square footage than we did in 2019. And in fact, the volume equaled the previous high volume year, which was 2015. In general, 2021 delivered a strong holiday season. More full price sales, less promotional, strong volumes, even when compared to the 2019 holiday season. We certainly experienced that with our fourth quarter comp tenant sales up 12% versus the fourth quarter of 2019. Some of the quarterly highlights included on a sequential quarter basis, we had occupancy gains of 120 basis points. That's on top of the 90 basis point gains we saw in both the second and third quarters. The year end our occupancy level was at 91.5%. We continue to make great progress on pushing occupancy up to pre-COVID levels. Since our low occupancy point in the first quarter of 2021, we've seen 300 basis points of improvement. We saw robust leasing volumes for the quarter and the year. Both were in excess of 2019 levels. We executed 3.5 million square feet of space. and that compares very favorably to the full year of 2019, which was about 3.4 million square feet of space. Leasing spreads were positive at 4.9% for the trailing 12 months. We saw great same-center NOI growth at 36% in the fourth quarter. That was the third double-digit quarterly gain in a row. We're optimistic heading into the fourth quarter as we raise the FFO guidance range to the midpoint of 196, That was a 3% increase on top of the increase in guidance from the previous quarter. Actual FFO per share exceeded the top end of that range and came in at 203. And that result was heavily driven by record-setting percentage rents. We continue to ramp up our redevelopment efforts as we move past COVID. During the fourth quarter, our joint venture with HPP on 1 Westwood in Los Angeles, we delivered a 584,000 square foot three-level creative office space to Google. We expect Google to open in the summer of 2022. The project remains ahead of schedule and on budget. The project is being fully funded with a construction loan. In addition to Google, we have numerous near-term openings with many exciting and prominent large format users, including, among others, Shields All Sports at Chandler Fashion, Caesars Republic Hotel at Scottsdale Fashion Square, Target at Kings Plaza, Lifetime Fitness at both Broadway Plaza and Scottsdale Fashion Square, Pinstripes at Broadway Plaza, and Primark at both Green Acres and Tyson's. These projects are expected to be funded with excess cash flow from operations. Focusing now on the leasing environment, the depth and breadth of the leasing demand has us very optimistic about 2022 and beyond. The leasing interest we are seeing comes from a wide range of categories, including health and fitness, food and beverage, entertainment and sports, co-working, hotels, and multifamily. All those categories are at interest levels we've never seen before. That is on top of demand for more traditional retailers like Target, Primark, Uniqlo, and Shields. During the quarter, we saw many retailers experience accelerating sales as they got further into the holiday season. And that's something they had not seen in years. In addition, because of the waning COVID restrictions, the importance of physical stores has become more significant to retailers as consumers want more social in-person experience of brick and mortar shopping. In addition, many retailers have strengthened their balance sheets and are financially in position to expand their new store openings. The combination of all these very positive factors have us very optimistic about 2022 and 2023. We expect significant gains in occupancy, net operating income, and cash flow this year. And now I'll turn it over to Scott to discuss in more detail the financial results and balance sheet activity. Thank you, Tom.

Now on to the highlights of the financial results for the quarter. Once again, we posted extremely strong operating results in the fourth quarter, with same-center NOI increasing 36% relative to the fourth quarter of 2020, both with and without lease termination outcomes. For the year, same center NOI growth was 7.3% including lease term income and 6.1% excluding lease term income. Early in 2021 and consistently thereafter, we signaled strong double digit growth was likely to come during the second half of 2021. And that is in fact how the latter half of 2021 played out with 29% same center NOI growth within the second half of 2021 relative to the second half of 2020. Funds from operations for the quarter were 46 million or 63% higher than the fourth quarter of 2020. FFO per share for the quarter was 53 cents. This was 8 cents or 17% higher than the fourth quarter of 2020 at 45 cents per share. And it also represents a 5 cent or 10% increase over consensus FFO estimates of 48 cents per share for the quarter. This was a very strong earnings quarter. Primary factors contributing to these quarterly NOI and FFO gains are as follows. On the positive front, one, the quarter included a 30 million or 19 cent increase in percentage rents resulting from the continued dramatic increase in sales that we reported earlier today and that Doug will soon explain in more detail. Two, minimum rent and tenant recovery income increased by 18 million or 11 cents per share. And three, common area income, which has recovered quite nicely, contributed another seven cents of NOI and FFO, including from our urban parking garages. As we've noted during the past few quarters, our common area business has recovered beyond our expectations, and in 2022, it may surpass pre-pandemic levels. Offsetting these factors were, one, a decrease in non-cash, straight line of rental income of 29 million or 18 cents per share, resulting from the high level of rental assistance granted to our tenants in the fourth quarter of 2020 due to the pandemic. And lastly, the fourth quarter also included a decrease of roughly 14 cents in FFO per share. That resulted from the increase in share count due to the common stock sold in 2021 through our ATM programs. And it was offset also by the interest expense from the proceeds raised from those equity offerings. This morning, we issued 2022 FFO guidance. 2022 FFO is estimated in the range of 185 to 205 per share. While certain guidance assumptions are provided within the sub-filing from earlier this morning, here are some further details. This FFO range includes a very healthy same-center NOI growth range of an estimated 4.0 to 5.5%. At the guidance midpoint, we anticipate a $14 million increase in FFO. The guidance also includes an estimated $10 million decline in non-cash straight line of rent in 22 versus 2021. So when you exclude that non-cash straight line of rent, FFO is estimated to increase by 24 million or 6%, which is an increase of 11 cents per share. So our outlook for 2022 reflects a very healthy increase in operating cash flow, which is what we've been focusing on for some time now. And given the strong pace of both reported occupancy growth as well as leasing activity, we anticipate that trend to continue beyond 2022. The guidance range assumes no further government mandated shutdowns of our retail properties. It does not include the issuance of common stock in 2022, and it does not assume any acquisitions or dispositions other than land sale transactions. In terms of the quarterly cadence for 2022 FFO per share guidance, we expect 25% in the first quarter, 22% in the second quarter, 24% in the third quarter, and the remaining 29% within the fourth quarter of 2022. More details of the guidance assumptions are included on page 17 of the company's Form AK-SUP, which again was filed earlier this morning. As for the balance sheet, As part of our continuing commitment to reducing our leverage, in 2021, we reduced our share of debt by an extremely noteworthy 1.7 billion, or 20%. During 2021, we generated free cash flow after payment of dividends and recurring capital expenditures of roughly $240 million. We expect continued cash flow growth over the coming years as our business continues to positively rebound post-COVID and grow. Net debt to forward EBITDA at the end of 2021 was nine times. This relative to leverage in the mid-11s at the end of 2020 as a result of the severe disruption from the COVID pandemic. So that's a full two and a half turns of progress in reducing leverage during just the past 12 months. And with what we believe is a very clear view to the future operating cash flow and NOI growth, we are well on our way to continued healthy improvement and leverage reduction and getting to our target of a sub eight times net debt to EBITDA, including undrawn capacity on our revolving line of credit, of which only 96 million of the 525 million aggregate capacity is currently outstanding. We have approximately $622 million of liquidity today. From a secured financing standpoint, in October of 21, we closed a five-year $65 million refinance of the shops at Atlas Park, which is a lifestyle center near Queens, New York, and we recently closed $175 million five-year refinance of Flatiron Crossing, an enclosed regional town center in Broomfield, Colorado, and the northern Denver market. 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 generally improving terms. Now I will turn it over to Doug to discuss the leasing and operating environment. Thanks, Scott.

we closed out 2021 with very strong leasing metrics and leasing volumes in fact 2021 was our strongest leasing year since 2015 when viewed on a same center basis i'm going to run through some various metrics and statistics some of which tom mentioned in his remarks and in doing so will hopefully provide a bit more detail and color sales were robust in december and this is on top of a very productive october and november Fourth quarter sales were up 12% over fourth quarter 2019. All categories, including food and beverage, count positively during the quarter. And this is on top of both the second and third quarters, each being up 14% versus 2019. Occupancy at the end of the fourth quarter was 91.5%. That's up 120 basis points from 90.3% at the end of the third quarter. Over the past nine months, portfolio occupancy has increased 300 basis points relative to the 88.5% occupancy rate on March 31st, 2021. And this pace of recovery certainly exceeds our expectations from early on last year. As I stated last quarter, and I still believe, given the much healthier retail environment that exists today, coupled with our strong leasing pipeline, we anticipate that occupancy will continue to increase throughout 2022 and into 2023. There were no bankruptcies in our portfolio in the fourth quarter. Trailing 12 leasing spreads were 4.9% as of December 31st, 2021. We feel good about the progress we're making on our 2022 lease expirations. To date, we have commitments on 39% of our 2022 expiring square footage with another 55% in the letter of intent stage. In the fourth quarter, we opened 276,000 square feet of new stores. For the full year 2021, we opened 900,000 square feet of new stores, which is about 2% more square footage than we opened during the same period in 2019. And I'm actually very pleased about this statistic, because if you think about it, the vast majority of 2021 store openings were a result of leasing done in 2019 and 2020. both of which were very difficult and challenging years to lease in, given the pandemic and the uncertainties it presented. Notable openings in the fourth quarter include Aritzia at Tyson's Corner, Aloe Yoga at Scottsdale Fashion Square, Urban Outfitters at Arrowhead and Chandler, Crunch Fitness at Deptford, Six Stores with Papaya at Arrowhead, Chandler, Desert Sky, Freehold, Scottsdale and Superstition Springs, and three stores with Windsor Fashion at Flatiron, South Plains, and Victor Valley. In the luxury category, we opened Marc Jacobs at Scottsdale Fashion, Chanel Face and Beauty at Kierland Common, and Versace at Fashion Outlets of Chicago. The effort of sourcing new and exciting emerging brands continues to pay off as we open Fabletics, Frankie's and Lucid Motors at Tyson's, SimGolf and Warby Parker at Washington Square, Forward at Scottsdale Fashion, 10 Shop in Tonnell at Santa Monica Place, and Guess Originals at Los Cerritos. Now let's take a look at the new and renewal leases we signed in the fourth quarter. In the fourth quarter, we signed 146 leases for a half a million square feet. For the full year 2021, we signed 833 leases for 3.5 million square feet. As Tom mentioned, this represents the highest square footage leasing volume for Mace Rich since 2015 when viewed on a same center basis. And speaking to the diversity of tenant demand we're seeing today, during 2021 we signed 99 new to Mace Rich tenants spanning 88 different brands for over 840,000 square feet. Notable leases signed in the fourth quarter include two key renewals with Apple at Fresno Fashion and Los Cerritos and as well as new leases with Free People Movement at Village Accord of Madera, Travis Matthew at Carolyn Commons, and Windsor Fashion at Fashion Outlets of Chicago and Fashion Outlets of Niagara Falls. We signed our first ever lease with Lidl, a 30,000 square foot international grocer from Germany with 11,000 stores across Europe and most recently the United States. They'll open at Freehold Raceway Mall in summer 2023, and we look forward to further scaling our business with them. In the home furnishings category, we signed leases with Lovesac at Freehold and Country Club Plaza, Ashley Furniture at Kings Plaza, and Jembro Green Acres Commons. In the emerging brands category, we signed leases with Fabletics and Leap at Broadway Plaza, and Scotch and Soda at Scottsdale Fashion. Lastly, as we continue to make our center something for everybody by adding ancillary service uses to traditional retail, We're pleased to announce the signing of the Department of Motor Vehicles at Valley River and the Veterinary Emergency Group at 29th Street in Boulder, Colorado. Turning to our leasing pipeline, at the end of the fourth quarter, we had 133 leases signed for 2 million square feet, which we expect to open in 2022 and 2023. In addition to these signed leases, we're currently negotiating another 93 leases totaling 710,000 square feet, which will open in 2022 and early 2023. So in total, that's over 225 signed and in-process leases totaling 2.7 million square feet of new openings throughout the remainder of this year and into 2023. And I want to emphasize, these are new openings. These numbers do not include renewals. So to conclude, Sales continue to be much stronger than they were pre-COVID. Occupancy is up 300 basis points over the past three quarters and is expected to increase throughout 2022 and into 2023. There are no bankruptcies in our portfolio in the fourth quarter. And bankruptcies overall are at their lowest levels since 2015, which is consistent with our significantly reduced tenant watch list. Leasing velocity is at its highest level since 2015. as evidenced by the 3.5 million square feet we leased in 2021, the result of which is a very strong, vibrant, and exciting pipeline of tenants slated to open yet this year and into 2023. And given the new and emerging brands, brand extensions, and non-retail uses that want to be in our centers, I don't see these trends reversing anytime soon. I believe 2022 and 2023 are going to be very exciting years on the leasing front. years in which we will continue to transform traditional malls into experiential town centers where people will want to come to shop, to dine, to socialize, and to be entertained. And now I'll turn it over to the operator to open up the call for Q&A.

Thank you. To ask a question, please press star, one on your telephone keypad. Also, if you are using a speakerphone, please make sure your mute button is turned off to allow your signal to reach our equipment. As a reminder, please limit your questions to one question and one follow-up question. Once again, that is star one for questions. First, we'll go to Derek Johnston with Deutsche Bank.

Hi, everyone. Thank you. I was hoping you could discuss private markets for a bit. You know, cap rates are so compressed for residential and industrial assets. Thus, there really seems to be a surging interest in retail right now. And notably, you know, local and grocer is certainly getting a lot of interest. But, you know, how is the interest in town center assets evolving? And could this perhaps impact, you know, your non-core assets and the dispo pace? And I say that especially, you know, as 90% of your NOI is derived from your top 30 centers.

Derek, it's a good question, although there certainly have not been any transactions for some time now, certainly in Class A regional malls. So it's really tough to speculate, you know, what a cap rate would be because there haven't been transactions. But given, as you mentioned, the very low cap rates in some other sectors, at some point the regional mall assets on the private side are going to be found to be very attractive. Can't tell you what that is yet because we haven't seen any transactions, but I will tell you if the market returns for some non-core type assets for us, we certainly would be active on the disposition side. You saw us do a couple dispositions in 2021, Paradise Valley, which is going to be converted from an old mall into mixed use, as well as a lifestyle center in Tucson we sold last quarter, and that was at about a five and a quarter cap rate or so. But other than that, we don't have any transactions that we have seen that we could use as a good basis for speculating what the cap rate might be today on a quality regional model.

Okay, great. And I guess, you know, switching gears, you know, it is a trailing 12-month metric, but, you know, rent spreads were positive across the board for the first time since 3Q20. that's on a consolidated JV and total basis. So have you reached an occupancy level where you're a little more comfortable and perhaps able to push rents a little more? And then on the flip side, is the tenant demand and the breadth strong enough to actually get pricing at this point?

Derek, I would say that it's always a fine balance between occupancy and rental rate. And Certainly, we were under pressure in the beginning of 2021 when we hit a low point on occupancy of 88% to fill space. And I would say that likely in the first and second quarter, we filled space, and it may have cost us a bit on rate. We felt that started to change and balance out in the third and fourth quarter as demand accelerated. So we had less space available, and we had an accelerating leasing environment, which really helped balance things between occupancy and rate, and we expect that to continue. Doug, you want to elaborate?

Yeah, Derek, to the point of the breadth of tenants, I mean, I think that is really going to be a factor in rate in the future. You know, we're leasing to all different sorts of uses, not just traditional legacy retailers, although they're still very important to our portfolio, but when you factor in the digitally native emerging brands, tenants we're doing internationally, Food and beverage, fitness, entertainment, grocery, health and wellness, service. It just adds a whole new dimension of retailers that we have to choose from, which is going to create competition and then ultimately affect rate.

Thank you, guys.

Thank you. Thanks, sir.

Moving on, we'll go to Craig Schmidt with Bank of America.

Yeah, I mean, obviously great news, the continued elevated leasing and the opening of new stores. I'm just wondering, is there going to be a problem with staffing these new stores? I mean, obviously to get new workers is getting more and more competitive, higher minimum wages, bonus signings, and just a shortage of workers. Could this be a cap? although they've leased these stores, can they get them all open in a regular space of time?

Craig, that's a good point, and it's going to continue to be a challenge for the retailers, and that's hiring enough good people. That's true of almost any industry today. But it doesn't seem to be slowing down the pace of new store signings and openings. Now, granted, some of those locations may be understaffed a bit, and service may not be quite what we'd like to see, but they're getting their stores opened.

Okay, thank you. And then just maybe a word on the Bloomingdale's and Arclight redevelopment. It looks like you're going to be bringing in both entertainment and office. I just wondered, you know, which would be on the top floor and which might be on the lower levels that Bloomingdale occupied?

Yeah, we're still in the process of that, Craig. As you know, that's a great location. It's right across the street from the end of the train line. Great visibility. And it was a two-level Bloomingdale's. And then on top of that was an arc light theater. So we now have possession of the theater space. It'd be very logical to put another theater up there and then put either one or two new tenants in on the first and second floor. We've had a fair amount of demand from creative office users, co-working, as well as more traditional retail. So a lot of different choices to make there, and you'll be hearing more about that in the quarters to come. But it's a great space. It's a quality situation for us.

Thank you.

And next, we'll go to Samir Khanal with Evercore ISI.

Hey, good morning, everybody. So just on your level of termination income that you're assuming for the year, the 22 million, uh, just wondering, um, kind of what's driving that, you know, I would have thought maybe that number would have been lower considering the, the, you know, the amount of closures that have been sort of at the lowest point here. So maybe Doug or anybody who wants to take that, maybe, you know, tell us what made the tenants categories that are describing that number.

Yeah, sure. Samir. Good morning, Scott. Um, Yeah, we've had a few termination settlements that have already triggered actually during the first part of this year, which is one of the reasons why you see the FFO a little bit higher than it would typically be in the first quarter. And so given those few transactions, and these are really kind of proactive brand closures from ongoing interests. They've just decided they want to consolidate brands, and so we've been able to negotiate settlements without naming names. You know, given those already inked and executed deals, we've got, you know, some termination income that's unspoken for, but that's really what's driving the high level of termination income in 22.

Got it. And then I guess as a follow-up, just maybe if we can, you know, unpack the guidance a little bit. I mean, it's a big range. And when you think about the sort of the low end and the top end of the range, I mean, is there anything that you can provide, whether it's, you know, what you're assuming for occupancy or any other kind of sort of line items here?

Yeah, the biggest factor that's really driving the range, and I think you probably heard this earlier this week too from one of our peers, is the tenant sales environment. We've made some assumptions in our detailed budgeting that sales are going to be relatively flat versus 21. That could certainly change. That's not a predictor of what's to come. I think that's just a reasonable assumption. And if it proves to be conservative, we could certainly exceed our percentage rent estimates in our detailed guidance. In addition, lease termination income, again, is a little bit large. We've got some of that spoken for, some of it that's not. We just touched on that, Samir. I'd say lastly, we also have some land sale transactions that are planned to be consistent with where we landed in 21 in terms of those gains and those FFO increases. But, you know, those are, you know, take a lot of planning and entitlement and due diligence to actually execute on. So that could, you know, ultimately occur or not occur. And so those are really some of the primary factors that are driving the wider range.

Samir, you asked about occupancy, and we picked up 300 basis points in 21, which is – fairly incredible. We're not expecting to be quite that high in 22 and 23. But if you said pre-COVID, our occupancy level was 94%. Today, we're at 91.5. It's 250 basis points to get back to where we were pre-COVID on occupancy. And I would expect roughly half of that to be picked up in 22 and half in 23. So we don't typically give guidance on occupancy, but I'll give you a

a ballpark there that you know roughly half of that 250 basis points will be picked up in 22 over the course of 22. great great thanks so much scott appreciate it we'll now hear from alexander goldfarb with piper sandler hey uh good morning out there uh so two questions for me uh first scott on the refinancings certainly the mall performance, the fact that you guys are exceeding 2019 sales healthily and the leasing volume, et cetera, I would think that would be making the lenders much calmer and in better moods to do refinancing. So is there something else that's going on as far as like the refinancings of the 2020 and the 2021s? I would think that the lenders should be pretty excited with how you guys have shown the rebound of the malls and certainly the strength of leasing.

Yeah, Alex, I think you're reading it correctly. The markets continue to get better quarter after quarter. And in fact, we're pretty active right now. We just closed last week, as I mentioned, alone on Flatiron Crossing. We're active on a few other transactions as well. The CMBS market is very productive right now, both on a single asset as well as a conduit basis. We're seeing some fairly strong interest, and that ranges from assets that start at 500 bucks a foot headed north. If you look at our pipeline, we feel pretty good about it. We've got some very high quality assets coming with maturities like Scottsdale Fashion, like Tyson's Corner, like Green Acres, where we've done a lot of leasing. And I think those are going to be very well received in the 23 timeframe and You know, like I said, we're extremely active. Banks are out there doing business. Debt funds are out there. And even some of the life companies are bidding on high-quality AMAL transactions. So, you know, given the quality of our portfolio, I feel good about our ability to execute here. And like I said, we're very active, and we'll continue to report those deals as and when they occur.

Okay, so just reading between the lines, sounds like the 2020 and the 2021s that are on short-term extensions. Sounds like those are still being worked through. So I guess we'll wait. That's what it sounds like. My next question is on, you know, unfortunately, all the theft, the crime that's been in the headlines. Obviously, you guys are not immune. Has there been any impact to leasing as far as tenants reacting one way or the other? I mean, your peer already commented on security expense going up. But just curious if there's been any fallout on the leasing front, either positive or negative, as tenants assess leasing. the other locations.

Hey, Alex, it's Doug. I'm talking to the retailers all the time. My team is talking to the retailers all the time. I would say the answer to that question is a solid no. And I say that because as we look at the deals we approve and we bring deals to committee every other week, we're substantially outpacing where we were actually in 2021. So we have not seen it.

Okay. Thank you.

Thanks, Alex.

Moving on, we'll go to Floris Van Dykem with Compass Point.

Thanks for taking my question, guys. You know, just delving into the same store NOI number a little bit more, obviously, you still have, you know, your 3% fixed bumps. So, you know, all things being equal. Everything else would, you know, go up by 3% if the world stayed the same. But you're going to see some occupancy gains, as you alluded to, Tom, maybe 125. It looks like you're signing that open. Pipeline is about, you know, about 5% of your total space, ballpark figure there. So, again, some significantly higher upside potential in terms of NOI, you know, as I look at it. tenant percentage today and I know your peers indicated what the rents were for the tenants. It looks like it's a threefold increase to permanent rents. What kind of delta is there? Is it similar in your portfolio?

I mean, I would say that you get between two and three times the rent from a permanent tenant than you get from a temporary. And what happened is we did see some good temporary tenant leasing in 2020 and 2021 because as we got a lot of that space back very quickly by virtue of the 2020 bankruptcies, it takes a while to generate a permanent lease. So we put a lot of that space in the hands of our specialty leasing group, and they had more inventory than usual, and they did a great job of filling a lot of that space on a temporary basis. You know, I'd say temporary occupancy – When we were at 88% permanent occupancy, we probably had close to 7% of our space was being leased on a temporary basis. And that's going to shrink and continue to shrink as we convert these leases to permanent leases. Another thing on the same center number, you've got to keep in mind that we're going to get a full year impact of that 300 basis point gain in occupancy that happened in 2021, but we won't see that economic impact until 2022. And in some cases, 23 if there's a delayed opening as a result of an extensive build-out. So that's part of what's driving same center, not just in 22, but should drive it also in 23.

And then maybe I noticed that while your leasing spreads were positive, which was very encouraging, the average rent signs is still below the average in your portfolio average. Do you expect your average ABR on leases, new leases executed to continue to steadily increase? And what has been the, you know, how much ability do you have to push to those rents? And maybe talk about your occupancy costs as well. And what has happened to your occupancy costs relative to the last couple of years?

Yeah, Flores, good afternoon. Yeah, we would expect average base rent to continue to tick up, you know, when you think of it, especially, excuse me, in the context of some of the COVID negotiations from 2020, where we did some heavy variable rent deals. We will continue to see variable rent convert to fixed rent with fixed annual escalators. So that's exactly where we want to be. So I would expect over the course of the next couple of years, As that variable rent converts to fixed, we'll see average base rents continue to tick up. On the cost of occupancy side, we've certainly seen that metric drop with the increase in sales. We haven't reported that, but I would say we're probably at what would be considered a historic low, just given the sales environment today. There's definitely some room to push.

Thanks, Dr.

And next we'll go to Linda Tsai with Jefferies.

Hi. Hi, Linda. Hi. Sort of tacking on to Alex's question, can you discuss how you'll approach the mortgages coming due in 2022? You noted a very healthy refinancing market, but what are the main steps to reach eight times net debt to EBITDA? And it sounds like raising equity isn't factored into your guidance.

Well, we continue to chip away at the maturity schedule. Linda, as I look at the debt that is rolling in 22 and in 2023, those assets are pretty well positioned. They're generally very high-quality assets. I called out a few earlier. And as I look at several of those, they're extremely underleveraged, which leads me to believe that we'll probably have a net liquidity – event over the course of the next 18 months as we refinance 22 and 23. You know, we're picking those off in order of time date and order of maturity. So again, we're very active in the market, spending a lot of time on it and receiving, you know, quite a good reception. So I feel good about where we stand right now.

How about the timeframe for getting to eight times?

Well, I think part of that is going to begin driven by increase in NOI. You know, we painted, I think, a pretty optimistic picture for 22 with, you know, with our same center NOI range at roughly 4.75%. With the occupancy growth that we're seeing, and again, occupancy being a leading indicator, and you'll see a lot of that cash flow come online later in 22 and into 23. And also with the pickup and leasing environment, you know, we really don't see that abating at all. And so as we continue to grow EBITDA and NOI, we'll continue to see that sub-8 target become much more of a reality.

I would expect it to happen by the end of 2023. You know, some of it depends on not just the pace of growth, NOI pickup, but also our ability to sell non-core assets. We kind of quietly went out and sold $150 million worth of assets this year and used those proceeds to de-lever. And I'd expect we'll see some of that in 22 and 23 as well.

Are you getting inbounds in terms of interest for your non-core assets?

Occasionally we do. Generally, you know, we're out trying to create the opportunity. And, you know, we do these on a one-off basis. We sold La Cantata Lifestyle Center in Tucson last year to a local buyer, and we sold Paradise Valley to a local developer. And, you know, they weren't necessarily marketed deals, but we knew somebody that had a mandate, had capital, and had an interest in those particular assets. So I think we're going to continue to operate that way in 22 and 23 years. And just to remind you, coming out of the financial crisis, we sold 29 malls. We decided to sell our lower quartile assets, and we were successful in selling those 29 centers. And that was roughly 2010 through 2015. Thanks.

Just one last one. On percentage rents, it seems like those were elevated in the quarter. Would you expect that to kind of remain the case over the next few quarters?

Yeah, I think so. Again, we've guided with flat sales assumptions. So over the course of time, as I mentioned to Floris earlier, we'll continue to see percentage rents convert to fixed. Those will naturally tick down. But we don't see the sales environment slowing down at this point. I think our assumptions are, like I said, relatively conservative. But I think over the course of time, we'll see variable rent continue to tick down to more historic levels probably over the next two to three years.

Great. Thank you.

Sure.

And next we'll go to Hong Zhang with J.P. Morgan.

Yeah, hi. I guess just adding on to Linda's question on the percentage rent side of things, if you're assuming flat tenant sales next year, does that mean you're essentially assuming a similar level of percentage rent in 2022?

We're showing some decline in percentage rent, again, just as a result of the negotiation and converting, you know, large store fleets that are renewing to fixed rate deals. So we do see some increase or some decrease of percentage rent in our 22 guidance. Again, percentage rents, you know, the sales assumptions may be flat, but it's very individuated on a deal by deal basis. You may have, you know, some tenants that pay more percentage rent than others. So it's really kind of a broad assumption. Some tenants may have fantastic performance like they did in 21 and generate some outsized percentage rent. It's very hard to predict and budget with a lot of specificity, but we are seeing some decline in percentage rent in our 22 guidance just as a result of the negotiation to fixed rents.

I guess on that topic, as you convert tenants from a higher percentage rent component to a more to a higher fixed rent component, is there, I guess, any slippage in revenue? Or would it kind of be whatever they would be paying percentage rent would kind of essentially be converted more to a fixed rent basis, if that makes any sense?

Yeah. Yeah. Essentially, the percentage rent would get converted to fixed. If anything, there might be a bit of a pickup. So, you know, typically... We're going to get the benefit of whatever that percentage rent was. It's just going to come in the form of guaranteed rent, which we'd rather have, which our lenders would rather see. It's easier for them to underwrite.

And that would typically come with the net charges as well, right? So you convert it to base rent, you convert it to fixed cam, you convert it to tax. So it's much more of a return to a traditional lease structure.

Guy, if I could sneak one last question in there. Your non-cash rent guidance represents a step down from where you used to trend historically. Is there anything one-time in nature going on with those lines?

No, not really. It's a function of, you know, if we've historically provided rental assistance as a result of COVID to tenants, you know, there was an elevated straight line of rent. And conversely, as you move forward and you flip the calendar year, And you compare back, you know, if there's less rent relief in prior years, then you're going to get less straight line in the subsequent years. So it's just that kind of natural seesaw relationship. You know, if you look at our 22 guidance, there's basically not a lot of non-cash accounting noise in the FFO, which kind of makes it a cleaner underwrite from our perspective. So that's really what's going on there.

Thank you.

And moving on, we'll go to Greg McGinnis with Scotiabank.

Hey, good morning. Just in thinking about that trailing 12-month rent spread number at plus 5%, how would that spread be impacted if you included the overage or percent rent that those leases have been achieving as well?

Yeah, good morning, Greg, or afternoon. We haven't quantified that, but it would certainly increase, you know, when you add the percentage rent element. We have historically provided our spreads based on just base rent, but we'd probably see a tick up. I don't have a figure for you, though. We'd certainly see a tick up there.

Okay. Yeah, what I mean, obviously, one of your peers talked about it on their call, and it was pretty significant. So, I just... Wanted to see if you guys had that, but we can discuss later. And then regarding your comment on several assets being under leveraged, the expectation that you'll increase the LTD on those assets, and then what would be the use of those funds, and how do you kind of balance that against the pursuit of lower leverage?

Yeah, I think to the extent we borrow in excess of the maturing principal amount, that would go to pay down debt. line of credit or other variable debt that we're able to pay down without penalty. Okay, great. Thank you.

And next we'll go to Rich Hill with Morgan Stanley.

Hey, good morning, guys. Hey, how are you? I have a clarification question about sales being flat. This has actually come up a fair amount with your peer. When you talk about sales, are you talking about like gross revenue or are you talking about transactions? And the reason I mention it is if we're talking about revenue and given the price of a good is up, does that mean transactions are down and your views that sales will be flat is actually fairly conservative? If you can just maybe talk us through a little bit more what sales being flat actually means, I think that would be helpful.

Yeah. And I think when Scott said sales being flat, he was relating that to the percentage rent question. So the full universe of tenants don't pay percentage rent. maybe 8% of your tenants are in percentage rent. And so for him to calculate and make a guidance assumption in 2022, he was assuming that those tenants that paid percentage rent, their sales would be flat for 2022. I don't, I don't believe sales are going to be flat for 2022. We see the momentum we've got. Can it remain at double digits? That's unlikely. But I could easily see sales moving forward, you know, at levels between 5% and 10% increase this year. I don't think we're going to lose that momentum. So I think that was just a comment that was specific to the percentage rent calculation for guidance purposes.

Got it. Thank you for taking up a lot of oxygen in the room over the past couple of days.

So in other words, Rich, we probably have a conservative percentage rent assumption in the guidance.

Well, that was going to be my next question, guys. I think everyone, including ourselves, and hopefully I'm not unique in this, we have trouble modeling percentage rents. You just had a blowout year and quarter with percentage rents. Could you maybe just provide a little bit more transparency on what you think you should assume or we should assume for percentage rents in 2022 as a percentage of 2021? Hopefully I didn't use percentages too many times in that question.

Yeah, there's a lot of percentages in there, so I'll try and steer away from the statement. I would say it's probably like 0.8 to 0.85 times what it was in 2021. I think we're going to see a little bit of tick down, but I think they'll still remain elevated.

Yeah, Rich, to give you just some anecdotal information, at Scottsdale Fashion Square, where we've got a luxury wing that we added a few years ago, luxury did not do well in 2020. But 2021, for many of them, they had sales that were two times what they had in 2019, and in some cases, three times. So those tenants got into, and I'm not going to mention names, but Those luxury tenants got into percentage rent to a much greater degree than we expected and probably greater than they expected. Certainly, we don't expect that's going to continue in perpetuity. We took a fairly conservative stance as we did our forecast and made our guidance as it related to percentage rent. That's why we've got a wide range.

Okay, got it. Hey, Scott, maybe we can just follow up offline when we catch up in a couple days. I'd like to just unpack that a little bit more. One more question, if I may. I actually think the Class B, C mall sale market is, I wouldn't call it vibrant, but by our count, there was almost 40 mall sales in 2021. 25 of those were operating class B and C malls. Cap rates came in fairly significantly in 2021 versus 2020 as you would expect them to. So I guess I would love to just go back to the question Derek was asking about mall sales. Is this a function of you thinking that cap rates are going to tighten even further and therefore there'll be a better time to sell the non-core in the future? Sorry for asking such a direct question, but why can't you sell? Why aren't you selling the assets?

Well, we were fairly active last year. We've only got, I would say, 10 non-core assets, and we sold two out of the 10. So part of it, too, Rich, you have to keep in mind the debt market hasn't been there for that type of asset. And it's slowly coming back, and I think that could change things fairly quickly. But, you know, we were very successful with our disposition program in the 2011 to 2015 range, and we've shown a willingness and ability to sell non-core assets and redeploy that capital into our better assets. And that's what we're going to continue to do. So if you think there's an opportunity somewhere... If you think there's an opportunity somewhere or you see a fund that's actively buying, give me a heads up.

All right. I will call you about that then. Thanks for humoring my obnoxious sell-side question.

Thanks.

Nice quarter, guys.

Thanks, Rich. Thanks, Rich. And next we'll go to Todd Thomas with TD Bank Capital Markets.

Okay, thanks. First question, Doug, appreciate the color around the executed leases and the pipeline, but I just wanted to go back to that. The 225 new leases, 2.7 million square feet, I think you said. Can you just share what Mace Rich's share of the NOI is that's associated with that backlog of leasing? So all tenants, including anchor spaces over 10,000 square feet, you know, CAM tax recoveries. What's the NOI look like for that backlog and what's the timeframe for that to come online?

Yeah, I'll go ahead and take that one, Todd. You know, our average share is about 70%, so you can kind of use that as a barometer, including consolidated as well as our share of unconsolidated centers. And I'm sorry, what was the second part of your question?

The NOI associated with that. for all spaces, so over 10,000 square feet, anchors, everything fully loaded.

Yeah, yeah. So I'm sorry. We haven't quantified that. We aren't providing guidance for that. But I think your other question was, look, what's the timeframe for that to come online? Small shops are typically six to nine months to get permitted for the landlord and the tenant to do their build-out work. You've got some large format space in there. Bear in mind, we've got things like Caesars Republic in there. We've got things like Google in there. So obviously those take a lot longer to gestate. You've got box backfills like Primark and Penstripes and the like. Those typically take about 18 months between lease execution and the cash flow to come online. So that's why we feel not only good about 22, we feel very good about 23 as well in terms of the occupancy, actually the cash flows from that occupancy really hitting the ground and running.

Okay. And then just following up on the occupancy discussion a little bit, and given some of the terminations, I guess, that you discussed that'll take place in the first quarter, And normally there's some seasonality, you know, at the beginning of the year where you do see occupancy decrease with a little bit of higher tenant turnover. But it does sound like, you know, leasing is really strong and the pipeline's, you know, fairly robust. Do you expect, you know, within the roughly 125 base point, maybe occupancy uptick that you expect throughout the year, do you expect occupancy to decrease sequentially to start the year or do you think that, you know, it could continue to just climb higher which I think you experienced for, you know, a couple of years, you know, in the recovery after the GFC.

Yeah, Todd, you're right. First quarter is typically the low occupancy quarter. You know, that being said, as Doug mentioned, you know, it was almost a record low in terms of bankruptcies in 21, and there's fewer people on our watch list. And typically we would see, you know, closures in the first quarter from weaker tenants, And we very well may have a year this year where we don't see that happen. You know, that being said, I would expect occupancy to kind of accelerate through the course of the year, and that 125 basis point pickup would happen probably mostly in the second and third quarter. Okay, so it sounds like. I mean, those are typically our most active quarters in terms of lease signings.

Got it. So it sounds like occupancy might sort of hold steady 4Q to 1Q before picking back up throughout the balance of the year a little bit.

That's a reasonable assumption, yes.

Okay. And then just lastly, with regard to the lease term fees that you mentioned, Scott, I think, you know, within for the full year, you know, how much of that do you expect then to be collected in the first quarter roughly?

A pretty decent chunk, I would say, in the order of magnitude of 40% to 50% of it. Okay.

All right. Great. Thank you. Sure.

Thanks. And we'll move on to Katie McConnell with Citi.

Great. Thank you. Just going back to a prior comment you had on land sales, could you specify what you're assuming for a range of potential land sale gains within your FFO guidance for this year?

Yeah, Katie, it's going to be very similar in 22 relative to 2021. Again, you know, there's multiple deals. I think we executed on probably, you know, 15 to 18 deals or so in 2021 roughly, and I think it's about the same type of volume in 22. There's a lot of transactional activity. Some could slip into 23. Some could actually go away, but right now in our guidance, we've got similar amounts in 22 relative to 2021, which were in the $20 million range.

Okay, great. Thanks. And then just on the capital allocation fund.

I'm sorry, go ahead.

Can you hear me? Sorry. I'm just going to ask you a plan for leasing CapEx spend this year and then separately what you're planning for redevelopment spend, including the anchor repositioning project.

Yeah, I don't think you'll see the leasing CapEx change a lot. Our development CapEx will continue to increase. We had about $100 million of expenditure in 2021 last year. I expect that to increase roughly 50% or so in 2022. And then going forward into 23, I expect it to increase even further. You know, we've outlined a few projects that we're getting entitled right now, so it's just natural for the development pipeline to start to ramp up.

Hey, Tom, it's Michael Billiman. I had a quick question just on the overall transaction market, and you were responding to Rich a little bit on deals. You know, Unibody Westfield came out a little bit more strongly this morning to say that the U.S. is definitely, on the chopping block to be sold. Obviously, a lot of those assets are in some of your core markets. How do you think about potential ways to enhance the platform and the portfolio? And are there capital sources that you can tap to effectuate a type of transaction to enlarge the pie?

I mean, we'd have to see, Michael. They came once before with assets and their pricing. did not seem appealing. They didn't get a lot of activity. And we'll obviously look at what they've got there. We've done a lot of joint ventures over time, and there's always ways to structure. If it's a deal that makes sense for the portfolio.

Right. I just wonder what the appetite is of your joint venture partners right now, and what would they be looking for in terms of assets relative to what they're invested in now, right? If they want to put incremental capital to work, what are they really looking for today?

Well, there hasn't been a lot of institutional capital, you know, lined up, um, for the mall sector in 20 and 21, we obviously got hit pretty hard and immediately by COVID. Um, that being said, I think their appetites are starting to warm up, particularly as they look at the type of, uh, yields they're getting on other property types. So, you know, I think it's only a matter of time. It's improving. I don't think it's there yet though.

Really focused on, I'm just trying to get a sense of, and I recognize the market's been very dry. There hasn't been much product and obviously the sector's gone through some challenges. You obviously have very deep relationships with some very deep pocketed investors that have put out incremental capital elsewhere. So you're talking about that relative spread, but when they're going to consider, investing in a mall, what are the characteristics today relative to where they've been before for what would pass their threshold? Assuming that the price is right, what are they really looking for?

Well, again, that's probably more a question for them, but obviously they're looking for post-COVID stability. I mean, we've never been through this before. I think everybody's looking to see how long the recovery takes and how quick the pace is, how quick the cadence is, whether the current leasing environment can stay as strong as it is. And if all those things remain, I think they're going to start to see, you know, more interest and hopefully some transactions.

Thank you, and that does conclude our conference. That will conclude today's call. We'd like to thank everyone for their participation.