Macerich Company (The)

Please stand by. We're about to begin. Good day and welcome to the May Switch Company second quarter 2022 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Samantha Greening, Director of Investor Relations. Please go ahead.

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

Thank you, Samantha, and thanks to all of you for joining us today. We're very pleased to report another strong quarter with the majority of our operating metrics trending very positively. After a strong first quarter, we also had a very strong second quarter. We saw a high level of retailer demand. The resiliency of the American consumer was again on display, and that is reflected in the 2.2% tenant sales increase in the second quarter compared to a very tough, tough comp quarter of the second quarter of 21. Our portfolio average annual sales per foot for tenants under 10,000 square feet was 860. That's our highest level ever. We continue to see traffic at about 95% of pre-COVID traffic, but tenant sales are exceeding 2021 levels and also pre-pandemic levels. With the first half of 22, sales were up 7.6% versus the first half of 21. And sales per foot were up 11%. compared to the pre-COVID quarter ended the second quarter of 2019. The quarter's leasing activity continued to reflect retailer demand that is at a level that we have not seen since 2015. Some of the other second quarter highlights include an occupancy level at 91.8%, which was a 240 basis point improvement from the second quarter of 21, and a 50 basis point improvement on a sequential basis compared to the first quarter of 22. We saw strong leasing volumes for the quarter, significantly in excess of pre-COVID levels. For the quarter, we executed 274 leases. That's a 27% increase over the second quarter of last year, and a 42% increase over the pre-COVID quarter of 2Q19. We saw same seller NOI growth of 5.4% in the second quarter compared to the second quarter of 21, which was yet another strong quarterly gain. FFO per share came in at 46 cents. We beat the midpoint of our guidance and we narrowed and bumped our guidance range. We continue to ramp up our development efforts as we move past COVID-19. We have numerous near-term openings with many exciting large format retailers including Shields All Sports at Chandler, Caesars Republic Hotel at Scottsdale Fashion Square, Target at Kings Plaza, Lifetime Fitness at both Broadway Plaza and Scottsdale Fashion Square, Pinstripes at Broadway Plaza, and Primark at both Green Acres and Tyson's Corner. These projects will be funded with excess cash flow from operations. And all these deals have been signed and they're under construction, but rent will not commence until 23 or 24, which speaks very well for our continued NOI growth going forward. In addition, we're pretty excited to announce the addition of 130,000 square foot Target to Danbury Fair Mall. The signing of Target completes the repurposing of yet another former Sears box. Primark's already in the upper level, and Target will occupy the remainder of the building. Target chooses its real estate very carefully, so the decision to locate in Danbury and Kings Plaza is an enormous testament to the quality of the real estate. Focus now on the leasing environment briefly, and Doug will elaborate in a moment. As expected, given the depth and breadth of the leasing demand, we had a very strong quarter. Leasing continues to come from a wide variety of categories, including health and fitness, food and beverage, entertainment and sports, co-working, hotels, and multifamily. In addition, the digitally native brands continue to increase their move into brick-and-mortar locations, including Aloe Yoga, Allbirds, Vori, as well as the electric vehicle companies such as Lucid, VinFast, and Polestar. Bankruptcies continue to be at a record low. As we move through the balance of the year, clearly there are economic uncertainties due to inflation, rising interest rates, and the war in Ukraine. However, we continue to expect gains in occupancy, net operating income, and cash flow from operations through the remainder of this year and into next year. In additional recent news, last week the Philadelphia 76ers announced that they're planning to build a new arena on a portion of the current Fashion District Philadelphia. We will continue to work collaboratively with the 76ers to be in position to close on our transaction with them sometime in 2023. Obviously, we believe the impact on the center city of Philadelphia and the local communities, as well as on the Fashion District Philadelphia, will be very positive. More details will follow as we get closer to closing in 2023. And now I'll turn it over to Scott to discuss in more detail the financial results for the quarter. Thank you, Tom.

On to the highlights for the quarter. This morning, we posted strong operating results. Same-center NOI increased 5.4% versus the second quarter of 2021, excluding lease termination income, and increased 7.8% when including lease termination income. Year to date, through the first six months of the year, same center NOI has now increased 14% excluding lease termination income and 18% including lease termination income. FFO per share for the quarter was 46 cents. This was an expected 13 cents lower than the second quarter of 2021, which was 59 cents per share. And it represents a one cent per share increase over FFO consensus estimates, which were 45 cents per share for the second quarter. Primary factors contributing to our quarterly results for FFO are as follows. One, a $21 million net of tax relative quarter over quarter decrease in valuation adjustments pertaining to our investments in retailers, which were unusually high in the second quarter of 2021. Secondly, a $13 million decrease in gains from land sales. Bear in mind that these transactions can obviously be lumpy by nature, quarter over quarter. And again, these were unusually large in the second quarter of 2021, creating a difficult comp. Third, an $8 million decrease in non-cash straight line of rent income, resulting from the high level of pandemic-driven rental assistance that we granted to our tenants last year in the second quarter of 2021. Offsetting these negative factors were the following. One, an $8 million reduction in interest expense, which resulted primarily from the company's dramatic 1.7 billion or 20% debt reduction during last year. Two, a $5 million of net benefit resulting from a $14 million quarterly reduction in rent abatements which was offset by a $9 million relative negative change in bad debt expense between the second quarter of last year and the second quarter of this year. During the second quarter of 21, we recognized roughly $10 million in reversals of prior bad debt reserves as we then finalized numerous pandemic-driven workout agreements with our tenants. And then finally, we had about a $5 million improvement in lease termination income. This was driven by a large settlement with a single tenant during the second quarter of this year. This morning, we updated our 2022 guidance for funds from operations. We narrowed the range and increased the midpoint for our FFO estimates. 2022 FFO is now estimated in the range of 192 to 2.04 per share, which represents a one cent per share FFO guidance increase at the midpoint. This FFO range now includes an increased expectation for same center NOI growth in the range of 5.5 to 6.75%. It's roughly a 60 basis point increase over our prior NOI guidance. Our estimates of 22 same center NOI growth have continued to improve as the year has progressed. We're pleased to report that. They've increased from 475 at the midpoint of our initial guidance to over 6% based on our current guidance from this morning. We also increased our guidance for both lease termination income as well as interest expense. At the guidance midpoint, we anticipate a $21 million or 5% improvement in FFO in 2022 versus 2021. As a reminder, our FFO guidance also includes an estimated $10 million decline of non-cash straight line of rent between last year and this year. Excluding that non-cash straight line of rent FFO is estimated to increase by a little over $30 million this year, roughly 7% growth, which represents an increase of 14 cents per share. Our 2022 outlook continues to reflect a healthy increase in operating cash flow. You can look for more details on our guidance assumptions on page 16 of the company's Form 8K supplemental financial information, which we filed this morning. As for the balance sheet, Thus far during 2022, we've been very active in the capital markets. On February 2, we closed a $175 million refinance loan on Flatiron Crossing. It was a floating rate loan at SOFR plus 3.7%. On April 29, we closed a $72 million 10-year refinance on Pacific View in Ventura, California at a fixed rate of 5.29%. On May 6, We closed a two-year extension of the $168 million loan on the Oaks at a fixed rate of five and a quarter. And earlier this month, we secured a one-year extension of our existing $164 million loan on Danbury Fair. That was at a fixed rate of 5.5%, which was unchanged versus the prior rate. Since we reported to you during our first quarter earnings call, the Fed's actions to temper inflation are significantly impairing debt financing activity within all commercial real estate sectors. Mortgage financings have slowed during the past several weeks. As a result, we will continue to utilize loan extensions as an important tool within our capital plan. We've been extremely successful securing extensions dating back to summer of 2020, albeit for different reasons during the pandemic. And in fact, we secured nine such extensions for over $1.6 billion, dating back to September of 2020. In the meantime, while we secure those extensions, we will prepare to execute on longer-term refinancing transactions once the markets reopen and become more liquid. Including undrawn capacity of $459 million on our line of credit, we have over $630 million of liquidity today. Debt service coverage is a healthy 2.7 times. Net debt to forward EBITDA excluding leasing costs at the end of the quarter was 9.0 times. We expect roughly $235 million of free cash flow after dividend and recurring capital expenditures this year. So we're well positioned in today's environment from both the standpoints of liquidity as well as cash flow generation. Now I'll turn it over to Doug to discuss the leasing environment.

Thanks, Scott. Leasing momentum continued in the second quarter, fueled by a very healthy retailer environment, sustained sales growth, and increased occupancy. Second quarter sales were up 2.2% over second quarter 2021. Year to date, sales are up 7.6% when compared to the same period last year. Sales per square foot as of June 30th, 2022 were $860, and this represents an all-time high for our company. Occupancy at the end of the second quarter was 91.8%. And that's an increase of 240 basis points relative to 89.4% at the end of the second quarter 2021. And we remain confident given the healthy retailer environment that exists today, coupled with our strong leasing pipeline, that occupancy will continue to increase throughout 2022 and into 2023. Trailing 12-month leasing spreads remain positive at 0.6% as of June 30th, 2022, and that's compared to a negative 0.2% as of June 30th, 2021. I'm happy with the progress we're making on our 2022 lease expirations. To date, we have commitments on 71% of our 2022 expiring square footage with another 22% in the letter of intent stage. And while we put the finishing touches on 2022, we're well on our way with addressing our 2023 lease expirations. In the second quarter, we opened 221,000 square feet of new stores. This brings our year-to-date store openings to over 400,000 square feet, which is about 20% more square footage than we opened during the same period last year. Notable openings in the second quarter include Free People in Williams-Sonoma at the Village of Cordova-Madera, Love Sack at Freehold Raceway Mall, and Country Club Plaza, three Windsor fashion stores at Green Acres, Kings, and North Park, and nine stores with cotton on, totaling almost 45,000 square feet. In the digitally native and emerging brands category, we opened Fabletics at Village Accord of Madera, Stance at Arrowhead Town Center, Interior Define at Tyson's Corner, three Leap stores at Scottsdale Fashion Square, Broadway Plaza, and Carolyn Commons, and three Quay stores at Arrowhead, Broadway, and Fresno Fashion Fair. In the entertainment category, at Vintage Fair, we opened a 35,000 square foot Dave & Buster's on the second level of the former Sears building. In conjunction with Dick's Sporting Goods, which previously opened on the first level of Sears, we've now substantially finalized the remix of this building and have done so with two best-in-class tenants. It's interesting. As I think back about all the fear and uncertainty that the media portrayed around Sears bankruptcy and subsequent store closures, I can't help but think about the opportunity these closings gave us. They gave us the opportunity to accommodate great game-changing tenants, not only Dick's Sporting Goods and Dave & Buster's, as I just mentioned, but also the likes of Primark, Target, Burlington, Zara, Whole Foods, and Round One, just to name a few. It's the perfect example of replacing a non-relevant retailer with higher and better uses. It's the very thing that will allow us to continue to transform our real estate. Turning to the new and renewal leases that we signed in the second quarter, we signed 274 leases for 1.2 million square feet. Year to date, we've signed 494 leases for 1.8 million square feet. And this is right on par with where we were at this time in 2021. And keep in mind, 2021 was our best leasing year in terms of volume and square footage since 2015. In terms of leasing activity for new stores only, during the first half of 2022, we signed 45 more leases for over 20% more square footage than we did in the first half of 2021. Continuing with our initiative to bring the very best entertainment concepts to our properties, we signed two round one deals in the second quarter, one at Danbury Fair, and one at Arrowhead Town Center. For those not familiar, Round 1 is a multi-entertainment and activity complex out of Japan offering bowling, arcade games, billiards, darts, ping pong, karaoke, and food and drinks. Round 1 at Danbury will be 60,000 square feet and located in the front of the center under the recently expanded and renovated Dick's Sporting Goods. At Arrowhead, Round 1 will introduce its 80,000 square foot Spocha concept. SPOSHA, which stands for Sports Challenge, will be all things round one, with the addition of sporting opportunities such as basketball, batting cages, soccer, dodgeball, and roller skating. Other important signings in the second quarter include Anthropology at Biltmore Fashion Park, Athleta at Santan Village, Chanel Beauty at Broadway Plaza, Garage at Fresno and Scottsdale, Lululemon and North Face at Washington Square, and Timberland at Fashion Outlets of Chicago. In the food and beverage category, we signed Raising Cane's Chicken at Washington Square, Shake Shack at King's Plaza, and Wood Ranch at the Oaks, just to name a few. Lastly, as we shift to emerging brands, in the second quarter, we signed leases with Aloe Yoga at Broadway Plaza in Kirlin Commons, Everlane, Tonal, and Purple at Tyson's Corner, Blue Nile at Broadway Plaza, Allbirds and Interior Define at Kirlin Commons, and Quay Australia at Arrowhead and Viore at the Village of Puerto Madero. So in conclusion, our leasing metrics are very strong, the best they've been since 2015. Sales remain ahead of pre-pandemic levels. Occupancy continues to increase. We have a very healthy retailer environment, and bankruptcies are at an all-time low. And we continue to outpace 2021 in our biweekly deal review, at this point by almost 40%. And while the future remains unknown, to date we have seen very little pullback from the retailers. But most importantly, given our best-in-class AA Plus portfolio, a very strong leasing pipeline of signed new leases still to open this year, next year, and even into 2024, together with the depth and breadth of uses that still want to be part of our town centers, I believe we are extremely well positioned to further reimagine and reposition our centers in a way that will continue to attract shoppers, regardless of what lies ahead. And now I'll turn it over to the operator to open up the call for Q&A.

Thank you. If you'd like to ask a question, please signal by pressing star 1, telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We ask that you limit your questions to one question and one follow-up question. Once again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. And we'll go first to Greg McGinnis with Scotiabank.

Hey, good morning out there. I just want to ask about the guidance range. It still seems kind of fairly wide at this point in the year, so I'm just curious kind of what brings in the top end or the bottom end of that guidance range?

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

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

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

No, you nailed this guy right on.

Okay, I'm sorry. Just to clarify, so what's the expectation then in terms of tenant sales contribution or over-drent when we think year over year?

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

Okay. Thank you so much. Appreciate it.

You bet. Thanks, Greg.

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

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

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

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

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

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

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

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

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

Yeah, hey, Craig, it's Doug. As we've talked about on previous calls, you know, when we hit our trough in occupancy during the pandemic, we were all about driving occupancy, and we did that. So as Tom mentioned, we're at that sort of inflection point right now where we've taken enough supply off the table to be able to focus more and more on rates. So I think you're going to see those spreads increase in the next few quarters.

Great, thank you. And then just, you know, you've opened a couple of new entertainment centers, Round One and Dave & Buster's, and I know you still have plans to introduce entertainment, I think, to Santa Monica Place and some other of your centers. What are you seeing from them in terms of traffic generation to your properties where you've introduced these entertainment concepts?

Yeah, Craig, it's a great question. That use, that category is extremely strong right now. And there was a lot of uncertainty coming out of the pandemic if this category was going to perform the way it did pre-pandemic. And we've seen nothing but great results from any of the entertainment uses that we've put in. And clearly, you know, their success is our success because they do drive a ton of football to our centers. They're very destination-oriented.

Thank you.

We'll go next to Flores Vanchickham with Compass Point.

Hey, guys. Thanks for taking my question. So, I guess to start off with, can you quantify what your signed not open pipeline is in terms of, you know, percent or basis points?

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

Thanks, Scott. And if you were to quantify that as a dollar's amount, do you have that number as well? We don't have that. And that would include the anchor space, presumably. That would be interesting as well. And then, and then my, I guess my, my followup question, um, would be on the, uh, is there a big difference in terms of refinancing debt, whether you're obviously it presumably will be easier if you're having a discussion with a bank as opposed to a, uh, uh, CMBS servicing, uh, um, uh, could you remind us again in particular Santa Monica, I believe is CMBS, um, Washington square, whether that's CMBS or whether that's a, that's a bank. And then I guess the other big one is green acres. early next year and maybe talk about the difference in discussions that you're having.

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

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

Yeah, generally used to pay down debt. We'll be strategic about what type of debt we repay, but yeah, that will be the primary focus. Perfect.

Thanks, Scott.

Mm-hmm.

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

Oh, hey. Good morning. Good morning out there. So two questions. First, Scott, on the guidance, you know, obviously the Fed's been pretty active on rates and doesn't show any signs of slowing down. But if I look at your interest guidance for the year from last quarter, which is 267 and now is 272, I would have thought it would have gone up more. a number of the other REITs have definitely been revising up their interest expense expectations for this year and even next so maybe just a little bit more color because it sounds like maybe this is playing into some of your land sales and what your debt pay down thoughts are so just want to better understand how you're viewing floating rate debt and interest expense given this is much smaller than it would have expected yeah sure alex uh you know and i don't have the exact numbers in front of me but we made a similar change

Three months ago to our interest expense guidance, it was roughly two cents or so. So, you know, we had already reassessed three months ago, and this is just an incremental change. So, you know, two incremental changes, and I think you'll find it's relatively comparable to perhaps what you've seen with other coverages that you have.

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

Okay, so Tom, what you're saying is even inclusive of, you know, these refinances, sorry, loan extensions you're doing where the rates are going up, this guidance obviously includes that, it sounds like what you're saying.

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

Okay, thank you. Second question is, on the same store, The back out for the non-same-store pool was pretty dramatic in the year-ago period, and this year it's actually positive. Scott, maybe just a little bit more color on what those adjustment factors are, the $35 million that was backed out of the year-ago period and then the $206 million that's added to this year's period to get from total portfolio to adjust down to same-store.

Sure. Specifically for the audience referring to page 8 of the supplemental, The biggest change is a $35 million adjustment from last year. Two factors in there. One is the retailer investment income that we mentioned in our prepared remarks. That was the lion's share of it. And then, two, we did dispose of a couple assets last year, Long Katata and Northbridge, and those are non-same-center adjustments in that same-center reconciliation table on page eight. So that's what you see there. Okay. Listen, thank you very much.

Thanks, Alex.

We'll go next to Linda Tsai with Jefferies.

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

Hey, Linda, it's Doug. Year to date, actually, all categories have been positive with the exception of shoes. So we're seeing it across the board.

Got it. And then I realize this is still a few years out, but regarding the stadium, how do you view, how do you weigh the NOI that goes away with the portion of the fashion district that you're providing to the developers with the growth that results in the remainder of the center from the stadium being built?

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

Got it. Thank you.

Thank you.

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

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

No. Identical. Identical. Two to three percent on base rent, four to five percent on recoveries. Taxes are a pass-through. So it's the same structure and, you know, obviously a more healthy cash flow stream as we recast some of those short-term variable deals from the COVID period.

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

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

Great. Okay, that was it. Thank you.

We'll go next to Greg Malman with Citi.

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

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

Okay. And then just second question. I'm just curious, on one west side with Hudson, are they still the exclusivity period on the

um buying at your interest in that property or you know where are you in that process of potentially just selling that interest and using those proceeds to pay down debt so that's an asset that has been turned over to google google's doing their build out i think expectation is for them to occupy the space either later this year early next year um our partner has a call on that asset we have a put on that asset But right now, we like the asset, and we like the NOI that's going to be thrown off from that asset, so we're not really in a hurry to do anything there. But we both have the right to do that if and when either one of us chooses to do that.

Great. Thank you.

We'll go next to Todd Thomas with KeyBank Capital Markets.

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

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

Okay. Just remind me, what's embedded in the guidance in terms of sales growth in the back half of the year?

Yeah, we're not getting too detailed in terms of our sales estimates, Todd. I would say, again, this. I would say this, that percentage rents Our outlook on percentage rents is better than it was six months ago, just given how we've started the year. But, you know, we're certainly not being overly aggressive in terms of our tenant sales assumptions here. That's one of the reasons we've got a range here. So we'll see how the balance of the year plays out.

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

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

Yeah, Todd, on the spend, it's roughly $100 million is going to be spent this year for the full year and about $150 next year. And the vast majority of those are the large format deals that we're talking about. And those deals have been signed, not paying rent yet. I think Floris asked the same question regarding how much of that, quantify how much rent that is. I think... We don't have that number at our fingertips, but it's fairly significant. And return on cost on those projects is, you know, going to be around in the 10% to 15% range on average.

Okay. And those will commence over the next, through 24, you'll see those rents come online.

Yeah. I mean, some of the big ones are fairly elaborate build-outs like, you know, Shield Sporting Goods, for example, and and some of the other big uses. So it's going to be 23 and 24. And so that's going to be obviously an NOI lift. It's not in the numbers today. It's in the occupancy, but it's not in the NOI.

All right, great. All right, that's helpful.

Thank you. Thanks.

We'll go next to Handel St. Just with Mizuho.

Hi, this is Ravi Vaidya on the line for Hyundai St. Jude's. Have you seen any difference in sales productivity on a relative basis between Sunbelt and coastal markets?

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

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

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

Okay. Thank you.

And once again, to ask a question on today's call, that is star 1 on your telephone keypad. And at this time, there are no further questions. I'll turn the call back to Tom O'Hearn.

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

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