Macerich Company (The)

Ladies and gentlemen, please stand by. Good day and welcome to the Mesa Rich Company third quarter 2022 earnings call. Today's call is being recorded. And now at this time, I'll turn the conference over to Samantha Greening. Please go ahead.

Thank you for joining us on our third quarter 2022 earnings call. During the course of this call, we will be making certain statements that may be deemed forward-looking within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995 including statements regarding projections, plans, or future expectations. Actual results may differ materially due to a variety of risks and uncertainties set forth in today's press release and our SEC 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 in the investor section of the company's website at macerich.com. Joining us today are Scott Kingsmore, Senior Executive Vice President and Chief Financial Officer, and Doug Healy, Senior Executive Vice President Leasing. With that, I turn the call over to Scott.

Thank you, Samantha. Good morning and good afternoon. Unfortunately, Tom is missing this call, as yesterday he had a death in his immediate family. At this time, we send Tom and his family our love, support, thoughts, and prayers. We are pleased to report another strong quarter with the majority of our operating metrics trending very positively. After a very strong first half of 2022, we also had a solid third quarter. We saw robust retailer demand. Tenant sales were flat in the third quarter. However, our portfolio average sales for tenants under 10,000 feet were $877 per foot, our highest level ever. We continue to see traffic at about 95% of pre-COVID traffic, but comparable tenant sales are exceeding pre-pandemic levels, with year-to-date comparable sales up nearly 5% versus the same period in 2021 and up over 13% compared to the same period pre-COVID in 2019. The quarter continued to reflect retailer demand that is at a level we have not seen since 2015. Some of the other third quarter highlights include occupancy at quarter end was 92.1%, there was 180 basis point improvement from the third quarter of 2021, and a 30 basis point sequential quarterly improvement over the second quarter of 2022. We continue to see strong leasing volumes, which for the year are in excess of 2021 levels. For the quarter, we executed 219 leases for 1.1 million square feet. We saw same center NOI growth of 2.1% in the third quarter compared to the third quarter of 2021, which was a very strong quarter. FFO came in at 46 cents per share. And on Thursday, last week, October 27th, we declared a 17% cent per share quarterly dividend, which represents a 13.3% increase over the prior dividend. We continue to focus on redevelopment and repositioning of our top-quality regional town centers. We are underway re-tenanting the approximate 150,000-square-foot three-level east end of Santa Monica Place, formerly occupied by Bloomingdale's and Arclight Theatre, with an entertainment destination use, high-end fitness club, and co-working space. Estimated project costs range between 35 to 40 million at an estimated yield of 22 to 24%. We expect this redevelopment to be completed in 2024. We intend to renovate and re-tenant the Nordstrom wing of Scottsdale Fashion Square with luxury-focused retail and high-end restaurant uses. Estimated project costs range between 40 to 45 million dollars at the company's share at an estimated yield of 13 to 15 percent. We also expect this redevelopment to be completed in 2024. We continue to secure entitlements and or plan transformative projects to redevelop at Tyson's Corner, the former Lord & Taylor parcel with mixed uses, and possibly flagship retail uses, at Flatiron Crossing in Broomfield, Colorado, with a multi-phased, mixed-use densification expansion for which we secured entitlements late last year, and at Cureland Commons in Phoenix, Arizona, for an expansion to add multifamily and office buildings to this amenity-rich property in the Northeast Phoenix market. As well, we are 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 Sears box. Primark is already open in the upper level, and Target will open in the lower level in 2023. As we all know, Target picks and chooses its real estate extremely carefully, so the decision to locate a Danbury Fair is an enormous testament to the real estate and to the center's performance and reputation. As Doug will elaborate on shortly, we continue to be very pleased with the strength of the leasing environment. As expected, given the depth and the breadth of leasing demand, we've had a very robust leasing result so far in 2022. Leasing interest continues to come from a very wide variety of categories and sources, including health and fitness, such as Lifetime Fitness and others, food, beverage, and entertainment, such as Pinstripes, Round One, and many others. Sports, grocery, medical, co-working, hotels, and multifamily continue at levels that, frankly, we've never seen before. Bankruptcies continue to be at a record low. We continue to expect to see occupancy gains and NOI growth through the remainder of this year and into next year. Now onto the highlights of the quarterly financial results. This morning, we posted solid operating results for the third quarter. Again, same center, NOI increased 2.1% versus the third quarter of last year, excluding lease termination income. Year to date, for the first nine months of this year, same center, NOI has increased 10%, both including and excluding lease termination income. FFO per share for the quarter was 46 cents. This was one cent better than the third quarter of 2021 at 45 cents per share. Primary factors contributing to this FFO per share increase are as follows. Firstly, a $10 million increase in gains from land sales, which obviously can be lumpy in any given quarter. Secondly, a $5 million increase in straight line of rental income. This was driven by write-offs during the third quarter of 2021 of straight line rent receivables. as we continue to work through our remaining pandemic-related tenant receivables assessments in 2021 last year. And third, a $3 million improvement in bad debt expense. This was driven by $2 million of bad debt reserves in the third quarter of 21, as we can also continue to work through our pandemic-related tenant receivable assessments last year. And then we had a $1 million benefit third quarter of this year in bad debts from collections of previously reserved tenant AR. Offsetting these positive factors were the following. Firstly, an $11 million decline in lease termination income. This was driven by a large lease termination settlement in the third quarter of 2021, which was from a national retailer that closed all of their stores within the United States last year. And lastly, an unexpected $4 million relative quarter-over-quarter decrease in valuation adjustments pertaining to our investments in retail funds. This morning, we updated our 2022 guidance for FFO. We narrowed the range and decreased the midpoint of our FFO estimates. 22 FFO is now estimated in the range of $1.93 to $1.99 per share. This represents a two cent per share decline in our FFO guidance at the midpoint. Most notably, this FFO range now includes an increased expectation for same center NOI growth in the range of seven to 7.5%. If this NOI growth is attained in 2022, given the 7.3% growth from last year in 2021, this would represent the second consecutive quarter of greater than 7% same center NOI growth as our core operating business has rebounded extremely well following the pandemic. This guidance improvement is due to better than expected top line revenue, including percentage rents, stronger common area revenue, and better than expected bad debt expenses. We also increased our guidance for straight line of rental income as well as interest expense by equal and offsetting amounts of $2 million. Looking at the reasons behind our revised FFO guidance, which at the $1.96 per share midpoint is a penny ahead of street consensus per Bloomberg of $1.95 a share, increased the following factors contributed to that guidance change. Increased same center NOI, which is roughly 3.5 cents per share of FFO improvements. This is expected to be offset by two factors. One, the previously mentioned decline in retailer valuation adjustments represented about a 2.5 cent per share FFO decline. And then secondly, the timing of a very large land sale that was expected to close in late 22, which is now expected to close in 23. This delayed land sale that should now land in 2023 represents a decline of FFO in 2022 of roughly $0.03 per share. To emphasize, our 2022 outlook for the core operating business continues to be very strong, with strong NOI growth and very healthy operating cash flow of approximately $370 million before payment of dividends. More details of the guidance assumptions are included within our Form AK Supplemental Financial Information, specifically page 16. That was filed earlier this morning. On to the balance sheet. We continue to focus on our remaining 2022 maturities. Year-to-date, we have refinanced or extended $580 million of debt at a weighted average closing rate of just over 5%. We expect to close on two multi-year extensions of our loans on Washington Square in Santa Monica Place during this month. The $500 million Washington Square loan is expected to extend for four years until late 2026. The $300 million Santa Monica Place loan is expected to extend for three years until late 2025. We expect the weighted average floating rate on these two extensions to be approximately SOFR plus 2.8%. Both loans will have interest rate caps in place, so they will effectively be hedged as fixed rate loans. Given these transactions are still pending, we are not at liberty to disclose further details of these transactions at this time. With those two deals collectively, we will have refinanced or extended nearly $1.4 billion of debt this year, including undrawn capacity on our line of credit, which we have about $424 million available. We have over $615 million of liquidity today. Debt service coverage is at a healthy 2.7 times. Net debt to forward EBITDA, excluding leasing costs at the end of the year, was approximately 9.0 times. I'm sorry, at the end of the quarter. We continue to be well-positioned in today's environment from both the standpoints of available liquidity as well as generating operating cash flow. And with that, Doug? I'll turn it over to you to discuss the leasing and operating environment.