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spk08: Good day and welcome to the Mace Rich Company first quarter 2022 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Samantha Greening, Director of Investor Relations. Please go ahead.
spk00: Thank you for joining us on our first quarter 2022 earnings call. During the course of this call, we'll be making certain statements that may be deemed forward-looking within the meaning of the safe harbor of the Private Securities Litigation Reform Act in 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 the 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 investor 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.
spk06: Thank you, Samantha, and thanks to all of you for joining us today. We are pleased to report another outstanding quarter with virtually all our operating metrics trending very positively. After a strong second half of 2021, the first quarter of 22 was even better, which is a tribute to our team and the quality of our portfolio. We continue to see robust and accelerating retailer demand. The resiliency of the American consumer is once again on display. Shoppers have come roaring back to our centers to shop with a purpose. We continue to see a high conversion rate, higher than pre-COVID, as traffic is about 95% of 2019 traffic levels, but tenant sales are exceeding pre-pandemic levels, with the first quarter of 22 sales up 11.5% over the first quarter of 2019 and exceeding the first quarter of 21 sales by 14.5%. That is the fourth quarter in a row with double digit tenant sales gains versus the pre-pandemic quarters in 2019. Retailer demand is at a level we have not seen since 2015. All sales categories but one, which was flat, were up in the first quarter. Tenant sales per square foot for the trailing 12 months ended March 31st of 22. came in at an all-time high of $843 per square foot. Some of the quarterly highlights included occupancy at quarter end of 91.3%. That's a 280 basis point improvement from a year ago. Although there was a modest 20 basis point decline from year end, that is very normal due to seasonality. Actually, over the course of the past 20 years, that decline in the first quarter versus the prior fourth quarter occupancy has been in the range of 30 to 100 basis points. So we were on the better end of that historic range. We continue to see robust leasing volumes for the quarter, as in the first quarter of 2022, we executed 220 leases, a 21% increase over last year. We saw same center NOI growth of 25% in the first quarter, compared to the first quarter of 21. That is the fourth double-digit quarterly gain in a row. FFO per share came in at 50 cents, a 13% increase over the first quarter of 21. We beat the midpoint of our guidance, we beat consensus, we narrowed our range, and we increased the midpoint of our guidance range. We continue to ramp up the redevelopment efforts in the first quarter. During the fourth quarter, we announced One Westside in Los Angeles delivered a 584,000 square foot, three level creative office space to Google. We expect Google to open this summer. That project remains ahead of schedule and on budget. The project is being funded by a construction loan. In addition, we have numerous near-term openings with many exciting and prominent large format users including Shields All Sports at Chandler, Target at Kings Plaza, Lifetime Fitness at both Broadway Plaza and Scottsdale Fashion Square, Pinstripes at Broadway Plaza, Primark at both Green Acres and Tysons. These projects are expected to be funded with excess cash flow from operations. Keep in mind that all these deals have been signed and are under construction, but rent will not commence until this year or into 22 and some, excuse me, into 23 and in some cases 24. It speaks well for our continued same center NOI growth going forward. Also within the past few weeks, Caesars Republic at Scottsdale Fashion Square commenced construction of a ground lease to develop a 254,000 square foot 265 key four star hotel. The hotel is well positioned adjacent to a recently developed restaurant collection and next to our grand entryway to our newly developed luxury wing. The opening of Caesars is anticipated in mid-24. Focusing now on the leasing environment, which Doug will elaborate on in a moment, but as expected, given the depth and breadth of the leasing demand, we had a very strong start this year. Leasing interest we are seeing comes from a wide range of categories, including health and fitness, such as Lifetime, food, beverage, and entertainment, and sports, including pinstripes and round one, coworking, hotels, and multifamily, all of which are at demand levels we have never seen before. In addition, the digitally native brands continue to increase their push into brick and mortar locations, including tenants like Aloe Yoga, Allbirds, Lucid, and Polestar, just to name a few. Many retailers have strengthened their balance sheets and are financially in a much better position to expand their store openings than they were pre-COVID. Bankruptcies are at a record low. The combination of all these positive factors have us very optimistic about 22 and 23. We continue to expect significant gains in occupancy, net operating income, and cash flow through the remainder of this year and into next year. And now I'll turn it over to Scott to discuss in more detail the financial results as well as some significant balance sheet activity. Thank you, Tom.
spk17: Now on to the highlights of the quarterly financial results. This morning, we posted extremely strong operating results for the first quarter. Same-center NOI increased 25% versus the first quarter of 2021, excluding lease termination income, and increased 30%, including lease termination income. While we expected a strong first quarter given the pandemic affected first quarter results of last year in 2021, NOI growth surpassed our expectations. Funds from operations for the first quarter of 2022 were $37 million or 49% higher than the first quarter of 2021. FFO per share for the quarter was 50 cents. This was 5 cents or nearly 13% higher than the first quarter of 2021 at 45 cents per share. and represents a four cent increase over consensus FFO estimates of 46 cents per share for the quarter. This is obviously a very strong earnings quarter. Primary factors contributing to these quarterly NOI and FFO gains are as follows. One, the quarter included a $15 million increase in minimum rents resulting largely from the elimination of pandemic driven abated rents, which were heavy during the first quarter of 2021. This was offset by reduced minimum rents from our 2021 asset dispositions. Two, an $11 million increase in common area income. As traffic is returned to pre-COVID levels, demand for our various common area business lines has followed. This revenue source continues to be extremely resilient and exceeds our expectations. We anticipate that our 2022 common area income results will surpass pre-pandemic levels as we previously reported to you. Three, an $11 million of savings and interest resulting primarily from the dramatic debt reduction in 2021 during which we reduced our debt by 1.7 billion or 20%. Four, a $9 million increase in lease termination income driven by a few large termination settlements within the quarter. It is worth noting that the timing of this termination income was consistent with our guidance expectations for the first quarter. And lastly, five, increased land sale gains of $8 million, the timing of which was also consistent with our guidance expectations for the first quarter. Offsetting these factors were the following. a $10 million decrease in non-cash straight line of rent income, resulting from the high level of pandemic-driven rental assistance granted to our tenants last year in the first quarter of 2021. Secondly, a $9 million quarter-over-quarter relative decrease in valuation adjustments pertaining to our retailer investments. Those were a positive $0.05 in the first quarter of last year in 2021, and a more moderated positive one cent FFO benefit in the first quarter of this year in 22. And lastly, three, the first quarter included a 16 cent negative impact in FFO per share, resulting from the increased share count due to common stock sold by the company in 21 through our ATM programs. This morning, we updated our 2022 guidance for FFO. We narrowed the range and increased the midpoint for our FFO estimates. 2022 FFO is now estimated in the range of $1.90 to $2.04 per share, which is a $0.02 increase at the midpoint. This FFO range now includes an increased expectation for same-center NOI growth in the range of 4.75 to 6.25%. Increased NOI expectations will be partially offset by the impact of increasing interest rates. At the guidance midpoint, we anticipate an $18 million increase in FFO in 22 versus 2021. As a reminder, the guidance also includes an estimated $10 million decline of non-cash straight line of rent in 22 versus 21, excluding the impact of that non-cash straight line of rent FFO was estimated to increase by $28 million, or 7%, an increase of 13 cents. Our 22 outlook reflects a healthy increase in operating cash flow, which we expect to continue to be the case given occupancy growth and continued strong leasing demand. More details of our guidance assumptions are included on page 16 of the company's Form 8K supplemental financial, which was filed early this morning. Now, as for the balance sheet, Thus far during the year, we've been very active in the debt capital markets. On February 2nd, we closed a $175 million refinance on Flatiron Crossing at SOFR plus 3.7%. On April 29th, we closed a $72 million 10-year refinance on Pacific View at a fixed rate of 5.29%. Last Friday, on May 6th, we closed a two-year extension of the Oaks Mall at a fixed rate of 5.25%. and we are currently transacting and refinancing Danbury Fair Mall with an expected $185 million five-year loan that we anticipate closing later this quarter. We continue to believe our financing pipeline is very manageable. Certain assets may require some loan reduction, such as Pacific View, and certain assets may result in excess proceeds, which is our expectation for the pending refinance of Danbury Fair Mall. As a reminder, through 2023, our assets with maturing debt include some very high-performing and underleveraged assets, and those include assets like Scottsdale Fashion Square, Greenacres Mall, Greenacres Commons, and Tyson's Corner. In fact, we believe those assets alone could produce between $350 to $400 million of excess liquidity and proceeds over and above the maturing loans. We look forward to reporting our continued progress on further refinancing and extension activity as the year progresses. including undrawn capacity of $424 million on our revolving line of credit. We have approximately $628 million of liquidity today. Debt service coverage, which for some reason does not get nearly the amount of focus that it should, stands at a healthy 2.7 times. Net debt to forward EBITDA, excluding leasing costs, at the end of the quarter was 8.7 times. And let's bear in mind the substantial progress that we've made in just five quarters alone as this metric has been reduced by almost three full turns from the mid-11s at the end of 2020 down to where we stand today. With an expected roughly $235 million of free cash flow after dividend and recurring capex in 2022, and given our expectation of operating cash flow and NOI growth, we continue to make great progress toward our longer-range goal of 7 to 7.5 net debt to forward EBITDA. Now I will turn it over to Doug to discuss the leasing and operating environments.
spk11: Thanks, Scott. As we discussed in our last call, 2021 was an outstanding year in terms of leasing. Actually, 2021 was our most productive year since 2015, with leasing volumes nearly reaching an all-time historic high for the company. And in fact, the first quarter of 2022 continued in the same fashion. I'm going to run through some various metrics and statistics, some of which Tom and Scott may have already mentioned in their remarks. But in doing so, I'll try to provide a bit more detail and color. First quarter sales were up 14.5% over first quarter 2021 and up 11.5% when compared to first quarter 2019. All categories in the first quarter, except for shoes, which was flat, showed double digit increases compared with first quarter 2021. Sales per square foot as of March 31st, 2022 were $843. And this represents an all time high for the company. It's interesting to note that on national level, March was the first month since the pandemic hit that online sales declined from the same period a year ago while in-store sales actually rose. Occupancy at the end of the first quarter was 91.3%. That's an increase of 280 basis points relative to the 88.5% at the end of the first quarter of 2021. And we remain confident, given the healthier retail environment that exists today, coupled with our strong leasing pipeline, that occupancy will continue to increase throughout 2022 and 2023. There was only one bankruptcy in our portfolio in the first quarter, and it consisted of one 3,000 square foot tenant at Scottsdale Fashion Square. In fact, this was the only lease that was subject to a bankruptcy filing in the past two quarters, given there were no filings in the fourth quarter of 2021. Now juxtapose this with 2020 during the heart of the pandemic when over 320 leases and nearly 6 million square feet in our portfolio were subject to bankruptcy filings. Trailing 12-month leasing spreads were a positive 1.3% as of March 31st, 2022, compared to a negative 2.1% as of March 31st, 2021. We continue to feel good about the progress we're making on our 2022 lease expirations. To date, we have commitments on 56% of our 2022 expiring square footage, with another 35% in the letter of intent stage. In the first quarter, we opened 188,000 square feet of new stores. Notable openings in the first quarter include Christian Louboutin at Scottsdale Fashion Square, Papaya at Fashion District Philadelphia, Urban Outfitters at Danbury Fair, Windsor Fashions at Fashion Outlets of Niagara, and six stores with cotton on, totaling almost 40,000 square feet. In the food and beverage category, we opened Longhorn Steakhouse at Danbury Fair, and Au Bon Sushi at Biltmore Fashion Park. In the digitally native and emerging brands category, we opened Polestar, Rothy's, and Scotch and Soda at Scottsdale Fashion Square, Avocado at Village of Corte Madera, Johnny O at Carolyn Commons, Nike Live at 29th Street, and Therabody at Santa Monica Place. Lastly, experiential tenants opening the first quarter include X-Lanes at Fresno Fashion Fair, Candyland Kids Cafe at Stonewood, Golf Lounge 18 at Danbury Fair, and Mayweather Boxing and Fitness at Le Cumbre. Now let's take a look at some of the new and renewal leases that we signed in the first quarter. In the first quarter, we signed 220 leases for over 600,000 square feet. Notable leases signed in the first quarter include Aritzia at Fashion Atlas of Chicago, Sephora at King's Plaza, Lovesac at Biltmore, Panerai and Oliver Smith at Scottsdale Fashion Square, four leases with J.D. Sports at Fresno Fashion Fair, Scottsdale Fashion Square, Victor Valley, and Vintage Fair, and three leases with Windsor Fashions at Greenacres, King's Plaza, and North Park. Scottsdale Fashion Square continues to attract some of the finest luxury retailers in the world, and in the first quarter we signed two more, Balenciaga and Bernardo Cucinelli, both of whom will join the likes of Dior, Louis Vuitton, Cartier, Saint Laurent, and Gucci, just to name a few. The digitally native and emerging brands category was extremely active in the first quarter. Least signings include Allbirds at Village of Corte Madera, Avocado, Viore, and Leap, at Kierland Commons, Fabletics at Chandler Fashion Center, Interior Defined at Tyson's Corner, Quay at Broadway Plaza and Fresno Fashion, Rourke and Parachute Home at 29th Street, and Tent Shop at Los Cerritos. And lastly, as we continue to add ancillary service uses to traditional retail in order to transform our properties into true town centers, we're pleased to announce the signing of America's Tire at Lakewood Shade Store Country Club Plaza, and Northwell Health at Atlas Park. As is the norm, I've provided many stats, figures, and metrics, all of which are public and very visible. But if you think about it, most of my remarks reference what's occurred in the past. So I want to talk for a minute about something that's not so public, not so visible, and that's our deal flow. At Mace Ridge, we have an executive leasing committee that meets every two weeks to approve new and renewal deals in order to generate new leases. And to date, we've already approved 52% more deals representing 10% more square footage than we did in the same timeframe in 2021. And keep in mind, 2021 was a stellar year. To me, this is a leading indicator of what's to come. It speaks to a forward-looking view of leasing velocity. And given the mood and health of the retailers, The resurgence and importance of bricks and mortar stores, the depth and breadth of uses that we have to choose from, I have no reason to believe this is going to end anytime soon. It's an extremely exciting time in our sector, and we at Mace Rich look forward to a very productive 2022 and the years beyond. And now I'll turn it over to the operator to open up the call for Q&A.
spk08: 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 your mute function is turned off to allow you to signal to reach our equipment. We ask that you limit your questions to one question and one follow-up question. We'll pause for just a moment. We'll go first to Derek Johnston with Deutsche Bank.
spk15: Hi, everybody. Thank you. I guess sticking with leasing, yeah, definitely a strong 2021 continuing this quarter. Um, positive comments in the pipeline, um, certainly well heard, but I guess what's the difference, um, with leasing demand here in 2022, um, versus a strong last year. And then just the second part of that question would be what kind of rent opportunity are you seeing in your sign not occupied pipeline?
spk11: Yeah. Hey, Derek, it's Doug. Uh, I think the, the answer to your first question really is, you know, I think 2022 is really a carryover from 2021. That's when we really started to see the strong leasing. And really, I attribute it, and I think I've talked about this before, but I attribute it to all the new uses that are out there. I mean, yes, legacy retailers are out there, and they're still very, very important to our portfolio. But you start layering in the digitally native brands, the F&B, the fitness, grocery, home furnishings, the electric vehicles, There's just so much out there to choose from, and I think that's the biggest difference between 21 and 22 and years in the past, especially pre-pandemic.
spk06: Derek, would you repeat the second part of your question?
spk15: Yeah, I was just wondering, you know, the rent opportunity that you're seeing in the signed not occupied pipeline and what that could look like and translate into a stores open.
spk11: Derek, you know, I think what we're seeing right now is we've got our occupancy to sort of an inflection point where we've taken enough supply off the table that, and we started this really in the fourth quarter of last year, that we can really focus on driving rent and driving rate. And for the first time in quite some time, especially in our top tier centers, we're starting to see competition for space, which we haven't seen since pre-pandemic. And I think that alone is going to help to drive rental rates in the future, 22 and 23.
spk15: Okay, great, and then last question. It looks like the total cost of occupancy is a couple percentage points lower, around 11 to an 11.5%, versus pre-pandemic levels of 13, 14. So I was just wondering, and thank you for resharing this metric, how should we read into this? Should we expect this to return to the historical levels, or perhaps is this the new standard? And, you know, does that lower number perhaps imply there's a little more room to push rents? Thank you.
spk17: Yeah. Hey, Derek. This is Scott. Good morning. Yeah, this is the first quarter that we've reported it. Now we've got a trailing 12-month sales figure that we can actually rely on post-pandemic. And I think it's really a function of just the accelerated sales that we saw in 21 and so far in 22 that's driving that metric lower. which then leads you to believe that, yes, I do think there is an opportunity to push rents. I'm not going to suggest we're going to get back to a 13% occupancy cost anytime soon, but given the elevated levels of sales that the tenants continue to achieve, I do think there's an opportunity to push rent kind of further supporting what Doug just mentioned.
spk08: We'll go next to Craig Schmidt with Bank of America.
spk05: Great, thank you. You know, Doug, listening to some of your comments, I'm just wondering is there any evidence that the retailers and their above average leasing activity could be impacted by inflation or the thought about a possible recession in 2023? Hey, Craig.
spk11: You know, we're not seeing that at all. Look, these retailers are pretty sophisticated. Many of them have been through cycles like this, and they know this too will end, but they're long-term in nature. I mean, you're talking about leases, five, seven, 10-year leases, so they're taking a much longer view of it rather than just looking at what's going on today. So no, we're not seeing it all in our deal flow.
spk05: Great, and then I just, do you have any idea who you might be putting into Nordstrom's place at Country Club's plaza?
spk06: We're still evaluating that, Craig. There's a number of pretty good opportunities for us, but it's too early to disclose what those are.
spk04: Okay, thank you.
spk08: We'll go next to Samir Kanal with Evercore.
spk16: Yeah, hi. Good morning, everybody. Hey, Tom, can you remind us what you're assuming for sales growth in your guidance at this point? I'm just trying to get an idea of percentage of rents. I know it's a little bit above what we were forecasting in the quarter, but just trying to get your view for the year.
spk17: Yes, Samir. You know, so we did take a look at certain tenants that had extraordinarily high sales volumes in 2021, and we've adjusted those kind of on an individual basis. For the balance of the tenancy, we've assumed relatively flat sales. So that means, you know, 21 versus where we're anticipating 22 to end up in terms of percentage rents that we still are forecasting a decline. It's a combination of tenants converting from variable rent to fixed rent. It's a combination of certain high-flying tenants in 21 producing more moderated sales levels in 22. But we still are forecasting a decline, though, in 22. And that's one reason that our NOI range is still relatively wide. We've got nine more months of sales experience to figure out.
spk16: Got it. Thank you for that. And I guess my second question is around occupancy. When I look at your JV properties, I mean, they were actually up sequentially, right, which is great to see. I mean, you own some of the best assets in that bucket of probably 1,000 a foot. I'm just curious, when you look at that bucket, 1,000 a foot malls, and then the kind of consolidated size, which is around 700, are you seeing any differences in sort of discussions at this point, whether it's deal flow, kind of discussion with tenant, anything different in terms of pricing power? Thanks.
spk06: Well, I mean, the tenants at the top doing $1,000 a foot are always going to be in demand. Excuse me, the centers doing $1,000 a foot are always going to have significant tenant demand. And I think Doug would admit it's a little bit easier, at least in those locations, than in the locations that are doing $700 or $800, although the demand has been good across the board in every single category. So, you know, obviously the ones at the top do a bit better, but But I think throughout our portfolio, we're seeing pretty significant demand, in many cases, better than we've ever seen. And I think that does give us pricing powers. As Doug said, we hit a friction point late last year where all of a sudden we were back at 91-plus percent occupied, and there was less space available, and we became more sensitive to rate. And I think we're going to see that as we continue through the year with pricing power shifting back in our direction a bit.
spk17: And Samir, it's worth also just highlighting the quality that is not only at the top of the portfolio, but throughout the portfolio. If you look at our top 20 assets, those generate about 70% of our NOI, and the average sales performance is over $1,100 a foot at the end of the quarter. And if you look at our top 30, that's about 86% of our NOI, with an average sales performance of about $960 a foot. So the quality really does... spread throughout the portfolio. So we really aren't talking about the top five, top ten. It's, you know, a very high-quality portfolio all the way down through 30. And that represents the lion's share of our NOI, and we are seeing great demand all the way through that top 30.
spk16: Thanks. And then just last one, if I may. You know, I mean, certainly all positive sort of comments here on the leasing side, on occupancy. So I was just kind of Was there something holding you back? What kind of held you back from not raising sort of the high end of guidance here?
spk06: Well, I mean, we still have a relatively uncertain interest rate environment, Samir, which is a big question mark as we move through the year. So we'll address it quarter by quarter. Obviously, the operating metrics have been great. And to some extent, something we control interest rates are a different matter. And so we felt it prudent to narrow the range as much as we did. As Scott said, we still have some variability as it relates to percentage rent. And I believe we were relatively conservative in our guidance as it related to that compared to last year where we had record-setting percentage rent, a lot of that driven by the luxury tenants.
spk08: We'll go next to Flores Van Discom with Compass Point.
spk10: Hey, guys. Thanks for taking my question. Just, you know, obviously, you know, solid reports. It appears that you're starting to push rents, which is an encouraging thing. Maybe just following up, the signed not open pipeline or basically your spread between leased and occupied, can you give that in terms of either percentage of space or in terms of a dollar number?
spk17: Morning, Floris, afternoon, I guess in your case. Yeah, the difference between physical and economic or leased occupancy is roughly about 2%, but You know, bear in mind a big portion of our pipeline is big box and anchor-oriented space, which takes a long time to, you know, get permitted, to get developed, and ultimately to start paying rent. You know, it's about, on average, a 12- to 18-month period between lease signing and getting those spaces open. So, you know, as we speak about occupancy, that's really the smaller shops, but we do have some very large rent-paying tenants that should start to generate significant cash flow in 23 and into 24 from those big anchor spots.
spk10: Thanks, Scott. And maybe the other question I have is, you know, again, you know, the investment community has been very skittish or careful on your ability to refinance your loans at your malls. And obviously you've managed to – extend or get new loans on a number of malls. And you have a couple more in the pipeline, as you suggest. Maybe you can talk a little bit about the environment, how the discussions are going. Is there greater demand on the lending side for your types of assets? And how do you see that evolving, even though rates clearly are trending higher?
spk17: Yeah, so, yeah, we've made great progress just alone, year to date. We've either closed on or are transacting on about $600 million worth of financing business. You know, that ranges from a quality of a center in Ventura, which is roughly $500 per square foot, Ventura, California, to the Oaks Mall, which is doing between $750 to $800 a foot. You know, we're transacting in a pretty wide quality spectrum, and we're still seeing an opportunity to refinance and or extend assets. You know, when we think about whether to refinance or extend, it's really a matter of where the business plan is at on a given asset. We obviously came through a pandemic, and in some cases, certain assets, it makes more sense to extend rather than do a five- or ten-year refinance because we need the business plan to further mature. So You know, you'll continue to see us to kind of take an individuated approach between doing longer-term financings and extending for a two- to three-year period. Just to kind of recount where we're at right now in the cycle, since fall of 20, about $8 billion, $8 billion, in CMBS business has been done in the mall space. Most recently, a transaction on Ala Moana, a transaction in a property owned by Taubman in Florida, were accomplished. And, you know, sequentially, if we look at where things were in the fall of 20 to where they are now, we've seen reduced debt yields. We've seen more of an inclination from the lending community to loan more than the outstanding balance of the loan. So there's excess overborrows. You know, all that said, today, it's a pretty tumultuous environment, given the Fed's actions to tamper inflation. So, yeah, rates are gapping out. But we're still seeing an opportunity to get things done. I would say that generally the market is pretty choppy today, and it's frankly not just for retail. It's across the board. But we still have a view that we'll be successful at getting our refinancings accomplished. And you can see what we've done just in about four months alone.
spk10: Thanks, Scott. Maybe just one slight follow-up here. In terms of the $350 to $400 million of excess proceeds that you might be able to pull out of some of your flagship assets, what would you do with that? Are those proceeds to be used for redevelopment, or are they going to be used to retire debt on single assets to create more flexibility in your balance sheet going forward?
spk17: Yeah, our focus is going to continue to be reducing debt, so I would see us using the line share of those proceeds to pay down debt.
spk09: Thanks.
spk08: We'll go next to Connor Mitchell with Piper Sandler.
spk03: Hi, thanks for taking my question. So, kind of just sticking with the interest rate environment and with rates already up and expectations for further rate hikes. Could you provide a little bit more color in your thought process on the guidance provided and the updated guidance this quarter compared to the end of prior year?
spk06: Sure, and I'm happy to comment on that. Only about 11% of our debt is floating. We've got a very small percentage of our debt that's floating. It's about $682 million. We also have a nicely layered maturity schedule that stretches out over the next nine years. roughly 10% to 15% of the debt per year matures. And certainly, we've got some uncertainty as to what the Fed will do and how that will affect the 10-year. Really, it's the first time since 2018 that we've seen the 10-year get above 3%. That being said, near-term, to offset some of those interest expense increases, we've got a significant same-center NOI growth expectation as we get back to our pre-COVID occupancy levels. you know, picking up, you know, 150 to 200 basis points of occupancy this year and the same next year. And also, as Doug mentioned, and Scott, we've got a very robust leasing pipeline where we've already signed and executed the leases, the build-outs underway, but we don't have the benefit of rent commencing yet. So we're able to manage it, and it really didn't have too much of a bearing on our guidance adjustments, it did have a bearing on keeping the range at 15 cents or so because of those uncertainties as it relates to rate.
spk03: Okay, that's helpful. Thank you. And then just one more question. Regarding the flat iron refinancing, is there an expectation that it might be sold soon or just that it was refinanced for three years and moved to a floating rate from previously fixed?
spk17: Yeah, right now it's sitting on a bank balance sheet. That's the near-term expectation.
spk09: Okay.
spk17: That's all for me. Thank you.
spk08: Sure, Connor.
spk16: Thank you.
spk08: We'll go next to Linda Tsai with Jefferies.
spk01: Hi. Once it's completed, would you ever look to monetize your 25% ownership of One Westside to help further reduce leverage?
spk06: Hi, Linda. Yeah, good question, and that kind of would be a natural outcome for that. It's a good asset with a great tenant, but that's certainly a possibility sometime in the not-so-distant future, I would think. No immediate plans for that, but it's certainly a possibility.
spk01: Got it. And then just one follow-up. The open-air shopping centers have discussed hybrid work resulting in lower dwell time but more trips to the shopping center. Has hybrid work changed patterns at your centers, and does it vary at all according to quality?
spk06: No, I don't think we've really seen it very much according to quality. I mean, an argument could be made that some of the business is shifting away from urban centers to suburban, and we have a fair amount of both, but that's probably the biggest impact we've seen as a result of hybrid working, working from home, less commuting, things of that nature.
spk11: Yeah, as I look back pre-pandemic and we look at our traffic, not only is traffic just about back to pre-pandemic levels, but we're seeing it across our portfolio and across our properties about the same as it was pre-pandemic. So I don't think there's a real argument that it's changed dramatically, if at all.
spk04: Thank you.
spk08: We'll go next to Mike Mueller with JP Morgan.
spk12: Yeah, hi. Just two quick ones. First, was there anything in particular that drove the trailing 12-month rent spread to contract a little from 5% last quarter to 1% this quarter? And also, the prior expectation of about 20 million in land sale gains in 2022, does that still hold?
spk06: So, Mike, as it relates to rent spreads, I mean, that can vary quarter to quarter depending on where these expirations are. It's kind of a blended number. So to have it move from 4% as it was in the fourth quarter to 1% I don't think is indicative of much, and I don't think it's a predictor of what we'll see the balance of the year. I think in general we have a lot more pricing power than we did two or three quarters ago, or even in the fourth quarter, frankly. First quarter tends to be a little bit slow. That's when most retailers have their natural fiscal year end. And we typically see more deal activity in the second and third quarter. So I think I would say that I wouldn't draw too many conclusions from that 1%. I think we'll do better over the course of the year. Scott, you want to comment on land sales? Yeah, sure.
spk17: So, you know, on the last call, I mentioned that we expected land sale gains to continue to remain elevated in 2022. And that was I said they'd be consistent with what they were in 21. Recall in 21 we had about, I think, $20 million of FFO benefit from land sale transactions. I still think that number holds today. We did anticipate a relatively high volume of closings in the first quarter, which is what we saw. The number was consistent with our guidance in terms of the cadence, and we saw $11 million of benefit in the first quarter. So I think that same guidance holds today.
spk12: Great, thank you.
spk04: Sure.
spk08: We'll connect to Kai Ben Kim with Truist.
spk14: Thank you. Good afternoon, everyone. I just want to go back to a couple of prior questions. On the occupancy cost, it was good to see that tick down to 11.3%, but I'm curious, given the labor situation, what is the total all-in occupancy cost to a retailer including wages. And I'm curious if that's actually picked up versus just the real estate occupancy cost, which is picked down.
spk06: It's going to vary depending on the retailer. And what we have heard from a number of retailers is they've ended up with slightly less staffing than they were pre-COVID. And even though the hourly rate may be up, the overall labor cost is flat to down. So we were actually hearing more about improving margins than shrinking margins. So I don't know how that factors into their occupancy costs, but that's certainly something we've heard fairly often from the retailers.
spk14: Okay. And it was good to see a lot of improvement in various metrics this quarter, and you talked about the strength in leasing demand. But when I take a look at your stock, it's trading at a close to an 8% implied cap rate. I'm just curious if that has spurred additional conversations with the board and what we could expect or what you're thinking about going forward to possibly help close that gap.
spk06: Well, as you can imagine, Keeban, we don't comment on earnings calls about what the conversations are in the boardroom, so I can't really comment on that other than to tell you that at today's current trading price of a multiple of less than seven times FFO, It's illogical. Obviously, you can tell from the tone of our conversations and comments here that we feel very positive about the business. So I think that what that really represents is a tremendous buying opportunity today.
spk14: Are additional asset sales, you still have a couple of dozen that are, you know, 100% fully owned. Is that in the cards at all and to possibly selling portions of that to your JV partner?
spk06: Well, we're always open to disposing of non-core assets. As Scott mentioned, the vast majority of our NOI comes from our top 20. We'd like our top 30 assets, anything beyond that. Opportunistically, we would be potentially a seller, but we have to see what the market dynamics are. We sold a couple assets last year. Those were one-off deals. I don't think the debt market is necessarily backed for assets in the $500-a-foot range. But once we get to a stronger debt market, it's certainly a possibility. And something you've seen us do in the past, you know, between 2011 and 2016, we sold 25 malls that averaged about $325 a foot in sales. So we believe in recycling our capital, and you will see us do that. It's just a question of, you know, when it's a market willing. Okay.
spk08: We'll go next to Richard Hill with Morgan Stanley.
spk02: Hey, good morning, guys. I wanted to come back to some of the questioning that Floris was asking. I was a little bit surprised by the amount of proceeds that maybe could be pulled out from some of your higher quality malls, undeniably very high quality malls. But if I'm looking at something like Green Acres Mall, I guess the 2013 appraisal from the CMBS deal was really attractive to Can you maybe walk us through the dynamics of being able to pull out more proceeds on a mall that was financed, let's call it 10 years ago or so?
spk17: Rich, keep in mind that we did, in between our acquisition and today, we did add a brand new power center. So that's a component of it. You look at green acres overall, and the exciting thing about that campus is it generates in aggregate a billion dollars. It is a an absolute retail hub within that area of Long Island. So when we looked at the 2023 pipeline and we provided estimates with bracketed outcome of $250 to $400 million, those are based on relatively conservative debt yields to what we're seeing happen today. Based on my comments when I was talking about the broader debt markets, We've seen debt yield shift into the highest single digit range for the best assets. And, you know, of course, Scottsdale Fashion Square ranks among the best assets in the United States. And so I've put some pretty conservative debt yields, and I'm not even saying I've driven them to high single digits to get to that outcome. Scottsdale is an asset where we put in a lot of capital, built a brand new luxury ring, which has been highly successful. Restaurants, we're adding Caesars, as Tom mentioned. Lifetime is coming soon. Brand new flagship Apple. There's all kinds of great things going on. So, you know, those three assets, including Tyson's, we do feel like we will be able to generate liquidity out of those three deals.
spk02: Got it. Your comments are well taken on the debt yield because I do recognize the debt yield on green acres on just what's in place is solely in the double digits. So point well taken. One follow-up question, and this isn't a Mace Ridge specific comment. We're actually getting a fair amount of questions across retail real estate, generally speaking. But obviously, inflation is higher than it was a year ago. Can you maybe talk about your ability to offset inflationary pressures on expenses relative to NOI? And are you in a position where NOI is actually inflecting enough between occupancy gains and rental increases that inflationary pressures, while always a concern, maybe not, could potentially be mitigated on the revenue side?
spk06: Yeah, Rich, good and timely question. I mean, historically, the mall, a quality mall sector has done okay during inflationary times because we have been able to keep pace. Now, granted, most companies have moved to a fixed cam component, but that accelerates pretty aggressively over the terms of a lease. Our typical Fixed-cam bump would be 5% a year. So no longer triple net per se, but still a great escalator. And in any given year, it's possible inflation could be higher than that. Over the course of the term of a lease, say five or seven years, it seems like we're always going to be ahead with those 5% bumps. So we think we're pretty well positioned to absorb the impact of inflation, at least as it relates to expense recoveries. Okay, great, guys.
spk02: That's it for me. We can follow up offline with more questions.
spk06: Sounds good, Rich.
spk04: Thank you.
spk08: We'll go next to Michael Dillerman with Citi.
spk13: Good morning. Still up there. Tom, I was wondering maybe you can just step back on sources and uses because you've been able to pull out a lot of sort of positive drivers in terms of the free cash flow, the refinancing. You talked about some of these assets you're going to pull out money from. But maybe you can just step back because I think there's a lot of uses of cash, and you talked about some of these redevelopment and development opportunities, whether it's Santa Monica, at Tyson's, at Washington Square, Los Cerritos, Flatiron, Curlin, they're all going to need money, and obviously you're going to spend money to generate a return. You have $2 billion of your share of mortgages coming due the rest of this year, 23 and 24. You have the free cash flow over $200 million. Just how do you bridge yourself between all of these sources of capital, all these uses of capital, and where you're going to source them all from at the end of the day?
spk06: Michael, we have a variety of ways we can structure our deals. As you mentioned, we've got a significant amount of cash flow after dividends, probably more than we've ever had in our history. Scott mentioned we have a pretty good expectation next year of having – refi excess proceeds. This year's about neutral. Next year should be positive. But we also have latitude as to how we structure deals. And a good example is something I mentioned earlier today, and that was the Caesars Republic Hotel. And that deal's a ground lease, so very little capital from our standpoint. Small amount of money to prepare the pad, that's about it. In the case of the redevelopment of the Sears boxes at Los Cerritos and Washington Square, similarly, we can do multifamily And in multifamily, we can just toss the land at the land value and stay in as a partner. If we choose to source capital, we can do that and increase our ownership percentage. But you'll see us evaluate all those potential structures. Obviously, our cost of capital is pretty high today. We're trading at a seven multiple. We'd have to be very careful with our capital decisions. So you'll see us do some structuring to reduce the amount of capital that we need to use above and beyond what we generate from free cash flow from operations.
spk13: And then remind me what you're going to do on Santa Monica and Washington Square in terms of those loans coming due this year. Are those just going to be a short-term extension until your business plans can be put in place? Is that the assumption there? Just at a higher rate sort of like what you've done on these other loans?
spk17: I'd say that's a pretty good guesstimate. Both have, you know, great merits. Both have business plans that have been impacted by COVID. And so my prior statements where I said you'll see us extend in some instances, I would expect that to be the case probably for both of those.
spk13: Okay. And then just finally, I guess, is there a plan at all, Tom, with all these moving pieces and knowing that this is where the street is very focused on, on maybe putting out a more in-depth sources and uses sort of spreadsheet where you can sort of detail out a lot of these elements to sort of ease the street in their views? Because I feel like there's a lot of these little pieces of information that doesn't take into totality of the organization and company that's running?
spk06: It's possible, Michael. I mean, I think we've probably put out as much or more than most. It's also to some extent dependent upon, you know, keep in mind during COVID, we shut off the redevelopment pipeline. We're turning that spigot back on, but we haven't necessarily on some of the bigger projects concluded how we're going to structure those things. So that would be a critical part of the equation. And, you know, once we have that, we'll probably... include a more robust redevelopment pipeline, which will include some of those pieces.
spk08: We'll go next to Caitlin Burrows with Goldman Sachs.
spk07: Hi, good morning. Maybe just on the common area income, you mentioned that you expect it could surpass pre-pandemic levels, which makes sense, but wondering if you could quantify how much potential there is on this line item and maybe the timing or cadence from here.
spk17: Yeah, sure. I expect that we will be able to surpass pre-COVID levels, you know, order of magnitude, call it two to 5%. You know, we've got a lot of that stuff is very sensitive in terms of like short-term contracts, advertising, things like that. So, you know, it's hard to say exactly where the year is going to end up. So there's, there is still some uncertainty with some of those shorter term high dollar contracts, but I think we're going to exceed it. I think it definitely exceeds our expectations. During COVID, things like advertising dollars, things like contracts with local merchants, that business completely dried up. Local merchants that aren't well-heeled certainly weren't in the business of opening up new stores, and large advertising contracts were not really relevant when traffic was so heavily impacted from the closure. So we're very excited to be able to say it's surpassing our expectations. It seems to be the case each and every quarter. So I think we're going to beat it, and I think it's going to be a relatively healthy beat. And that's a part of it is, you know, why we still got a wide range in terms of our same-center NOI, because we still have some work to accomplish there, Caitlin.
spk07: Got it. Okay. And then maybe just on the financing theme, again, I know it's brought up a number of times, but just given that rates are up a lot, I was wondering if you could comment on how your outlook or plans have just generally evolved over the last two or three months and for the deals that you're working through or have already gotten through, have the terms like rate or amount or length are comparing to your expectations? It seems like you're saying no change, but that then also seems surprising versus what we've heard from some other rates.
spk17: Well, we've certainly seen an increase in rate. Given the environment, benchmark rates 10-year, 5-year have gone up. SOFR and LIBOR have gone up, and they will continue to go up with the Fed's continued actions to dampen inflation. And we've seen spreads gap out as well, and that's frankly not just a retail thing. But in terms of term, I think it's pretty consistent. We actually, I believe... accomplished the first 10-year mall deal post-COVID, which was done in late April. So, I don't think there's been a huge change other than, you know, really rates have ticked up.
spk07: Got it. Thanks.
spk08: At this time, there are no further questions. I'll turn the call back to Tom O'Hearn for additional or closing remarks.
spk06: Great, thank you, Operator. Thanks for joining us today. I know it's been a long earning season for all of you, so you're probably a little bit on the tired side. Glad you joined us. We enjoyed a very solid start to this year. We're excited about the balance of the year, and we hope we see many of you at ICSC and NAREID in the upcoming weeks. Thanks.
spk08: This does conclude today's conference. We thank you for your participation.
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