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spk10: 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.
spk00: 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.
spk12: 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.
spk08: Thanks, Scott. Leasing momentum continued in the third quarter as evidenced by strong metrics and very high volumes. Third quarter sales were flat when compared to third quarter of 2021, and this was expected given the very strong sales in the third and fourth quarters of 2021. However, year-to-date sales are up almost 5% when compared to the same period last year. Sales per square foot as of September 30th, 2022, were $877, and once again, this represents an all-time high for the company. Trailing 12-month leasing spreads were 6.6% as of September 2022, compared to 0.6% last quarter and negative 2.5% a year ago. And this is the strongest spread result we've had since the third quarter of 2019 pre-pandemic. We're just about finished with our 2022 lease expirations with nearly 90% of our expiring square footage committed and the remainder in the letter of intent stage. And while addressing our 2022 expirations, we've concurrently been working on 2023. To date, we have almost 25% of our 2023 expiring square footage committed with another 50% in the letter of intent stage. In the third quarter, we opened almost 250,000 square feet of new stores. This brings our year-to-date store openings to just over 650,000 square feet, which exceeds where we were at this time last year. Notable openings in the third quarter include Sephora at Kings Plaza, Athleta at Santan Village, Doc Martens at Broadway Plaza, Garage at Scottsdale Fashion Square, North Face at Washington Square, JD Sports at Fresno Fashion and Vintage Fair, and two more stores with Cotton On at Kings Plaza and Queen Center. In the luxury category, we opened Louis Vuitton Men and Balenciaga at Scottsdale Fashion Square. We opened 15 new stores totaling almost 40,000 square feet of digitally native and emerging brands in the third quarter. Kierland Commons in North Scottsdale remains a hotbed for this category, as Allbirds, Avocado, Bad Birdie, Public Rec, and Travis Matthew all opened there in the third quarter. Other notable openings in this space include Madison Reed at Biltmore Fashion Park, Parachute Home at 29th Street, Purple at Santan Village, and VinFest Village of Corte Madera and Santa Monica Place. And as we continue to transform our properties into true town centers, we're committed to bringing non-traditional uses to our campuses. And the third quarter was no exception. We opened Department of Motor Vehicles at Valley River, Kid City at Green Acres, Shade Store, Country Club Plaza, and a veterinary hospital at 29th Street. Turning to the new and renewal leases that we signed in the third quarter. We signed 219 leases for 1.1 million square feet. Year to date, we've signed over 700 leases for 2.9 million square feet, and this is right about where we were at this time in 2021. And it's worth repeating, 2021 was our best leasing year in terms of volume and square footage since 2015. And after years in the making, we're extremely pleased to announce the signing of Hermes at Scottsdale Fashion Square. Hermes, an iconic brand that is arguably the most sought after luxury retailer in our industry, will open an 11,000 square foot store, joining the likes of Louis Vuitton, Dior, Cartier, Saint Laurent, Versace, Prada, and Brunello Cucinelli just to name a few. This will be Hermes' first store in Arizona, with its closest being in Las Vegas. The addition of Hermes will unquestionably make Scottsdale Fashion Square the primary luxury destination, not only in the Scottsdale market, but in the entire state of Arizona. And at the same time, making Scottsdale one of the most important luxury addresses in the United States. Other notable leases signed in the third quarter include Louis Vuitton at Broadway Plaza, Gucci Men at Scottsdale Fashion Square, Arterix and Kendra Scott at Tyson's Corner, Aritzia at Village Corner Madera, Doc Martens at Los Cerritos, Free People Movement at Cureland Commons, JD Sports at Country Club Plaza, Lululemon and Love Sack at Santan Village, and Levi's at Washington Square. And at Danbury Fair Mall, located in Danbury, Connecticut, in the third quarter, we signed a two-level, 20,000-square-foot deal with Barnes & Noble, where they'll relocate from an open-air lifestyle center just down the road from our property. And I bring this up because all the chatter out there around retailers preferring open-air lifestyle centers to enclosed shopping centers. So this further proves my thesis that it's not about the venue, but rather it's about the best real estate. And with the recent additions of Target, Round One, and other prominent brands and experiences, it's clear that Danbury Fair sits on the best real estate in the market and retailers are proving that with their choices. At Queen Center, we signed leases with two very prominent and noteworthy international apparel brands totaling almost 100,000 square feet, and we look forward to announcing these brands in the very near future. While it's hard to find game-changing tenants for Queen Center that already does over $1,700 per square foot in sales, we believe this duo to be just that, both in terms of sales and traffic generation. In the third quarter, we signed leases with over 20,000 square feet of digitally native and emerging brands across the portfolio, including Allbirds and Brilliant Earth at Broadway Plaza, Avocado at 29th Street and Washington Square, Madison Reed and Outdoor Voices at Cureland Commons, Third Love at Tyson's Corner, and Torrid Curve at Fresno Fashion. And that's just to name a few. And to reiterate the continued strength of our deal flow, year to date, we reviewed and approved 45% more deals for 35% more square footage than we did during the same period in 2021. Once approved, these deals moved to documentation and are added to our already very strong leasing pipeline. This strong shadow volume bodes extremely well for continued occupancy and revenue growth for the remainder of this year, next year, and even into 2024. So in conclusion, our leasing and operating metrics are solid. Sales are outpacing last year. Occupancy continues to increase. Leasing spreads are now positive in the mid-single digits, the strongest they've been in three years. Leasing volumes are on pace for a second consecutive record-setting year. And as I mentioned last quarter, although the future remains unknown and despite the macroeconomic backdrop and the looming potential of a recession, To date, we have seen very little pullback from the retailers, which I think is a result of the healthy retailer environment that exists today, as well as a testament to our best-in-class portfolio of shopping centers. And now I'll turn it over to the operator to open up the call for Q&A.
spk10: Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. Keep in mind, if you're using a speakerphone, make sure that mute function is released to allow that signal to reach our equipment. Please limit yourself to one question and one follow-up question to allow everyone an opportunity to participate. Once again, star one for questions. We'll pause for just a moment. We will begin with Greg McGinnis with Scotiabank.
spk07: Hey, good morning out there. Good morning, Greg. Just looking at the development pipeline, hoping you could discuss changes in the disclosure with the removal of some of the potential Sears redevelopments. And then your thoughts on mixed-use redevelopment as we stare at higher borrowing costs, higher construction costs, and looming economic risks.
spk12: Yeah, good afternoon, Greg. Changes to the development pipeline, I mean, in terms of Sears, you know, we've really addressed the lion's share of the boxes, with the exception of those that we intend to scrape and add mixed-use and more densification. So, for example, we've completed the re-tenanting of the boxes at Vintage Fair, at Deptford Mall. We just mentioned the re-tenanting at Danbury with Target to a company, Primark, on a smaller scale. We re-tenanted the Shears box at a property in upstate New York, Wilton Mall, with a hospital use. So we've really addressed most of those. We're still in entitlement and or pre-leasing for Washington Square and Los Cerritos. And once we have projects to report, we'll certainly report those. Likely, they will land in our development pipeline. So at this point, it was appropriate to remove those. We have supplemented that now with two very exciting projects. One is effectively, again, a re-tenanting of three levels at Santa Monica Place. It's great real estate right across from the light rail station. We intend to provide a variety of different and diverse uses to attract incremental traffic to that property. We're very excited about those uses, and we're at least right now in lease documentation with most of them. Very attractive returns as well. At Scottsdale, it's really just an evolution of the luxury expansion that we did and we completed two to three years ago. Recall, we intensified our luxury and concentrate our luxury in the run to Dillard's and Neiman Marcus, if you've seen it. The names are global. The names are domestic. The names are thick and broad. And as a result of the – really, it's been an incredible amount of demand. As a result of that continued demand, we're going to continue that luxury leasing effort through the Nordstrom wing. Doug just mentioned, in particular, our maze, which we had announced a couple months ago. So, again, a very exciting project. Pre-leasing is progressing at a very good level and very attractive returns. Lastly, you mentioned mixed use. I would say, you know, yeah, I would say that, you know, generally the unlevered yields in multifamily, you know, even at the beginning of the year, independent of the increased borrowing costs, which are certainly a factor, but at the beginning of the year, those yields were in the 6% or so range on levered yields, and that really wasn't even attractive to us back then. As we've mentioned, though, Greg, our land positions are highly coveted within our communities. They garner a very significant value from many of our development partners, and so we would continue to envision deals in which we would either contribute the land by ground lease or contribute the land into a joint venture and participate in the NOI stream from residential uses and from office uses that way. So that game plan really hasn't changed. I would say it's only been reaffirmed as a result of the increased borrowing costs in today's environment.
spk07: Thank you. I appreciate all the color there. Just sticking with development pipeline, are there any updates that you can provide us, whether on 76ers Stadium, any numbers around that yet, or working with the city on entitlements or ability to do what you guys want to do there, and then also on the Carson Outlets.
spk12: Yeah, in Fashion District, I can't report much more at this point. Our development partner continues to work with the city on entitlements. We continue to secure control of any space that's necessary to accommodate the development of the arena, which again would be several years down the line in the 2031 timeframe, which is when that would open. So nothing more to report. Certainly in terms of economics there, I would anticipate we may be in a position to give you more over the next few quarters. As far as Carson, that remains an ongoing legal matter, and I'm just not at liberty to expand on that right now, Greg. Thank you, though.
spk10: All right. Thank you. We'll now hear from Derek Johnson with Deutsche Bank.
spk13: Thank you. Can we hear your thoughts on the push and pull between increasing the dividend, especially with the stock where it's trading now, versus potential other uses like ramping redevelopment or even deleveraging?
spk12: Yeah, sure. Just as a reminder, we used the opportunity during COVID to reset our dividend. Along with the very robust recovery in the business, that's given us an opportunity to harvest a good amount of free cash flow I mentioned earlier. that cash flow on an annual basis after payment of recurring CapEx, but before dividend payments, it's approximately $370 million. So fast forward two and a half years later after we made those dividend decisions, the business is on firm footing. We're very confident about the outlook of the business. We still remain committed, Derek, to maintaining healthy payout ratios. We still remain committed to retaining cash flow to reinvest back in the portfolio and to reduce our debt. At the end of the day, the dividend change that we made was approximately $18 million. So we do think it's important to get back into a cadence of increasing our dividend, given the outlook for the business. No guarantees for future increases, but we would certainly hope to be in a position to revisit that down the line as well. So Really, it's a firm vote in terms of our confidence for the business and the outlook for the business right now. We still remain committed to reducing our leverage and to reinvesting back in the portfolio through developments. And Scottsdale and Santa Monica are great examples of that. Post-dividend change, our payout ratios are still very acceptable, very low. leading into that, our payout ratios, by the way, were one of the lowest in rate world. So I think there's a good balance between all three things, and we're going to be mindful of the balance between our balance sheet reinvestment back in and also returning some capital to our shareholders.
spk13: Okay, great. Makes sense. Secondly, you know, you've had a pretty strong lease volumes here for a while at this point. Just hoping you could speak to the potential rent coming online over the next year and the cadence of openings, especially after opening 250,000 square foot in 3Q. I was wondering what you're anticipating for the fourth quarter and 2023. Thank you.
spk12: Yeah, sure, Derek. So falling short of providing you guidance for 2023, I'll say that the leasing pipeline continues to be real strong. Over the last few quarters now, it's exceeded 3 million square feet, both between signed deals and deals that are in process. And the deals that we review twice monthly continue to be, it's a very strong, very high volume agenda. So, you know, our view is we'll continue to see a strong NOI growth, revenue growth coming from that. We do have a new disclosure and our investor deck will continue to keep that updated as we move forward, which does provide the incremental rent impact that we would expect. from any new stores that are coming online. So you can refer back to that. Like I said, we'll keep that updated. The view is, Doug, unless you tell me otherwise, and I don't think that's the case, our pipeline's strong and it doesn't show any signs right now of abating.
spk08: No, it sure doesn't, Scott. And the question I get asked all the time, given what's going on in the macroeconomic environment out there and the looming recession, is are the retailers pulling back? And the short answer is they're just not. We have a very, very healthy retailer environment right now. You know, those that were going to fail pre-COVID ended up failing during COVID. So we're left with a watch list that is as low as it's ever been, and a lot of retailers out there with very healthy balance sheets. So, you know, we don't see this ending anytime soon.
spk03: Yep, yep.
spk04: Sounds good. Thanks, everyone. That's it for me. We'll now move to Craig Schmidt with Bank of America.
spk10: Thank you.
spk05: I just wanted to maybe dig into what really drove the higher leasing spread. As you pointed out, it's the strongest it's been in three years. Are you getting more pricing power or was this a fortunate quarter that just played out well? I'm just looking for more explanation on the 6.6 leasing spread.
spk12: Yeah, good question, Craig. We've been talking about it for a few quarters now that with the pickup and occupancy, we'd start to think we could start to push on rate, and that seems to be the case. You know, we got to 92% occupancy, which creates that tension between supply and demand. And as we review deals again every other week, it seems like we're getting more and more pricing power. You know, in a given quarter, it's kind of hard to tell. I think as we started the year, we were hoping that we'd get to kind of a healthy mid-single digit leasing spread. In fact, I think maybe we even spoke into that in a call or two ago, and we're pleased to be sitting here now. And as we look forward, you know, based on all the deals we're reviewing, I think that's a level we can continue to sustain. Doug, any commentary on that?
spk08: No, I think you're spot on, Scott. We talked about, you know, our main goal coming out of the pandemic was all about occupancy, occupancy, occupancy. And, you know, we've gotten to our self-position now. at a 92% occupancy level to be focusing on rate, which is exactly what we're doing.
spk05: It sounds like obviously you have a lot of confidence in the continuation of the leasing spread. Are your expectations for holiday 22 to be reasonably positive?
spk12: Yeah, I think so, Craig. You know, if you look at the national forecasts that are out there, they call for mid-single-digit type of holiday growth. We certainly won't see the 15% or so growth, mid-teens growth, that we did in the fourth quarter of last year. But, you know, I think it's reasonable to assume, based on our conversations with the retailers, they feel optimistic about some growth this year, just not as robust as last year.
spk08: And Craig, it's Doug. I've read a couple of surveys, and it really feels, and it excites me, it really feels like the vast majority of shoppers this holiday are going to be shopping bricks and mortar. In addition to online, but bricks and mortar is in favor. It's the delays in shipping, which were abundant last year, I think frustrated a lot of people. The shipping costs are getting expensive, so I think bricks and mortar is going to be very, very favorable this holiday.
spk04: Thanks for the call. Thanks, Craig.
spk10: Our next question will come from Samaria Canal with Evercore.
spk13: Hey, Scott. Good morning. I know you guys are not providing guidance for next year, but just generally, how are you thinking about potential tenant fallout, you know, sort of the post-holidays, normally when we see them, right, and coming off a year where it's basically been nil or basically zero. So clearly positive momentum on the leasing side, but just trying to figure out if there's any sort of headwinds we sort of need to think about into next year.
spk12: Yeah, it's hard to say that we're going to have the same type of nil year in 2023 that we've experienced in 2022. But ordinarily right now, we'd start to hear from retailers that we're setting themselves up for a major renegotiation, a major restructure, we'd start to hear from them. We'd start to hear from their consultants. And that's really just not the case. So I think it will be 2023 will likely be an unusually low year. I don't think it's going to be a nil year, but I do think it's going to be a low year in terms of tenant fallout. You know, as well, I would say our renewal conversations with our retailers are still very strong. You know, they aren't coming in requesting to shed stores. I think generally they've right-sized their fleets in the United States, and they're in expansion mode for the most part. But we don't see them shedding stores, especially in our high-quality town centers. So I think the backdrop is set for continued occupancy growth. There may be one or two here or there that file, but nothing that's on our radar screen at this point in time, Samir.
spk13: And I guess, Doug, just shifting over to you in terms of, you know, the negotiations, you talked about retailers not, you know, pulling back. They're still continuing to open up stores. But, you know, if you kind of take a step back, I mean, what are they pushing back on here? Is it primarily for the higher TIs or CapEx? I mean, what sort of the pushback you're getting as you kind of talked about that sort of 25% of leases that are committed and then sort of the balance you're negotiating?
spk08: Hey, Samir. You know, the pushback, like always, whether it's now or whether it's pre-pandemic, it's always a function of rate. And, you know, rate is a negotiation. I would say that tenant allowances are consistent. They haven't changed very much over the last several years. So I would say the battle is always around rate. You know, thankfully, given the quality of our portfolio, we're able to get what we need to get.
spk04: Okay, got it.
spk13: And then one more, Scott, if I can, on the guidance range. I know you talked about land sale gains maybe coming in, I think, later this year, but shifting over to 23. In terms of modeling, is this sort of a recurring kind of an item we've got to start putting into our models now? And if so, what's sort of the magnitude we've got to think about sort of annually going forward?
spk12: Yes, Samir, we've – Most of the land sales are concentrated in our Arizona portfolio. These were land holdings that we've had on the balance sheet for 15 to 20 years as we, at one point in time, envisioned expanding that market with further regional town centers. That's no longer the case. So we've continued to sell through that inventory. We will continue to sell that inventory into next year. We'll provide you a little more clarity on the 2023, inaugural 23 call when we give guidance, but I think those will start to really subside in 24 and going forward. There will always be a little element of that with pad sales here and there, but I think by the time we get to the end of next year, a good majority of that will be exhausted. So we'll give you a little more clarity in three months.
spk04: Got it. Thank you. We'll now move to Flores Van Ditchcom with Compass Point.
spk03: Thanks, guys, for taking my question. It sounds like the underlying business seems to be doing pretty well. You've got 9% same store NOI growth year's date, record tenant sales, positive leasing spreads. Your S&O pipeline is fairly robust. It was $33 million expected of incremental or revenue for next year approximately. When do you guys think that you can get back to 19 levels of NOI? Obviously not providing guidance for next year, but just how comfortable are you that you're going to get there? So if you can give some color on that, that would be great.
spk12: Yeah, sure, Floris. I mean, we're very comfortable we're going to get there. The question is when. You know, again, the pipeline is very strong. We do think that by the time we get to the end of next year, we'll be there on a leased occupancy basis. Obviously, there's some delay in start times for those new stores. And so, yeah, without giving you guidance in terms of 23, I think on a run rate basis, we'll be there in terms of occupancy by the end of next year.
spk03: And then the other thing, the other question I had for you is in terms of your OCR, which is relatively low at 10.8%, I believe, we're starting to see your ability to push rate through. Can you maybe talk us through some of the – the dynamics of that and how tenants are looking at rent relative to, and their occupancy costs and relative to their ability to pay more rent going forward.
spk12: Yeah, you know, you're spot on. I mean, our ability to push rate as indicated by spreads is, you know, negatively correlated with cost of occupancy at 10.8%, less than 11%. You know, that's about 100 basis points, I think, below where we were At the end of 2019, it is probably, if I went back in time, four or five-year low for us. So that's kind of a leading indicator of our ability to likely push rents, given the profitability of our portfolio. Doug, do you want to?
spk08: Yeah, I would say less and less cost of occupancy is becoming less and less relevant. These stores in our town centers for the retailers are more than just selling merchandise. You know, they buy online, pick up in store. They buy online, ship from store. So while cost of occupancy is still important and something we look at, we really look to the value of our real estate and our properties. And that's how we price our real estate, not necessarily strictly off the cost of occupancy.
spk12: And bear in mind, Flores, you know, competition, which there certainly is competition for our better real estate also allows you to push rate. And so we're certainly seeing those situations where there's a competitive situation as we lease space.
spk03: Thanks. And maybe the last question for me is in terms of specialty leasing, it's really hard for investors to figure out, okay, it doesn't show up in leasing spreads. It doesn't typically show up in other things. And how is that progressing? What are you seeing in, for kiosks and billboards and parking and other ancillary revenue? And as the economy gets better, how much more ability do you have to increase that amount?
spk12: Great question, Flores. I think we've spoken to this before, and I'll just confirm that, you know, that's one segment of our business that will, in fact, be back to pre-COVID levels this year. The local merchants, the advertising contracts, all that ancillary revenue, parking revenues, et cetera, have bounced back extremely well. If you look at our occupancy, we're still north of 7% in terms of our temporary tenancies. And so there's always a push and pull between Doug and his counterpart that's in that temporary tenant kind of specialty leasing world. And anytime we're able to convert those deals to permanent uses, you're talking about a pickup and rent that's probably two to two and a half times what the temporary tenant was paying. So that certainly should be a big component of our growth going forward is converting temporary occupancy to permanent occupancy. The good news is the local merchants with which we worked with extensively throughout the pandemic have recovered quite well, and we've shed some. but certainly the demand has maintained very strong. We're looking forward to converting that to permanent, though.
spk04: Thanks. That's it for me.
spk10: Our next question comes from Linda Tsai with Jefferies.
spk01: Hi. Recovery of bad debt has been a tailwind in 22, and netting that with the view that tenant fallout is likely low in 23. Is the bad debt line item a headwind or still a potential tailwind to earnings in 23?
spk12: Hey, Linda, I would say it's probably relatively neutral. You know, GAAP forces you, once retailers file, once retailers are showing significant signs of weakness and not being able to meet their contract rent for the remainder of the lease term, GAAP compels you to reserve those receivables in their entirety. We've certainly received some benefits of collections of those this year. We'll see that to a lesser extent in 2023. I think it's going to be relatively neutral. It's not a big needle mover, but we don't see a huge bad deadline item at this point in time next year.
spk01: Got it. And then on Hermes opening in Scottsdale, how are luxury retailers thinking about their U.S. store growth plans over the next two to three years?
spk08: Hey, Linda, it's Doug. Luxury is a very, very strong category right now in the United States, and the luxury tenants are very active. They're looking hard at Scottsdale, and as Scott mentioned earlier, we finished our remix with the Neiman Marcus wing and are going to move now to the Nordstrom wing, and we probably have more demand right now from the luxury sector than we have space. So, you know, we see it as very aggressive, but keep in mind, you know, we don't have a lot of luxury. Our luxury really is focused around Scottsdale Fashion Square, fashion outlets of Chicago, and to a lesser extent, Santa Monica Place.
spk04: Thank you. We'll now move to Connor Mitchell with Piper Sandler.
spk11: Hi, thanks for taking my question. I just have a couple. So first, in Alexander's earnings release, they reported that IKEA, that was recently opened in Regal Park, is now leaving. Do you guys see any tenants potentially closing up early at urban locations? And do you think this might be a one-off or if a similar situation could be possible elsewhere?
spk12: No, I don't think so. I mean, there's always going to be situations where a store underperforms and they're going to leave. I don't think that's an indictment necessarily on large format urban locations though, Doug.
spk08: No, I mean, I would consider Kings Plaza in Brooklyn an urban location. I would consider Queens Plaza in Queens an urban location. And we've seen little to no fallout in either one of those centers. And I think that's sort of indicative of what's going on in the urban world within our portfolio.
spk12: The good news is in some of those locations, the opportunity to backfill is pretty significant. Doug, you alluded to Queens Center. That's roughly 100,000 square feet with two very prominent apparel retailers that we're not at liberty to disclose right now. So as space does come up, the opportunity to backfill them with, frankly, incrementally accretive resources from the sales and traffic generation is pretty high.
spk11: Okay, appreciate that. And then regarding OneWestSide, now that it's open and Google has moved in, Do you see yourself in harvesting these types of assets, the non-core assets and selling your position or how do you view the market at your stake and the ability to transact to these types of assets?
spk12: Uh, well, one West side is certainly unique. It's a single tenant, uh, Google credit. So, you know, you can look and see what the cap rates are for that. It's very attractive. There's mechanisms in that joint venture agreement. I can't get into that do allow for, um, uh, a transaction to occur. In the meantime, we're going to enjoy the diversity of NOI from Google, which is obviously a fantastic credit. And we're certainly celebrating the conversion of a regional mall project that is no longer a retail project. It's now a Google campus of 600,000 square feet. It's very noteworthy. So we'll hold on to that NOI, and at the appropriate time, we'll go ahead and consider something.
spk04: Okay.
spk11: And then if I could just one last quick one, um, regarding Washington square Santa Monica place, um, are you guys expecting any, uh, expensive or heavy principal pay downs with the extension? If you could speak on that.
spk12: Yeah, I can't get into the details. Those are transactions that are pending. So it'd be inappropriate for me to do. So I'll just tell you that, you know, we've exercised, um, um, our ability to secure extensions and refinancing is for the last couple of years. with very little capital to pay down, and I'm not sure that's gonna be any dissimilar to what we're doing with Washington Square and Santa Monica, but we can't get into specifics there. We will report once those transactions are closed, which should be in the next few weeks.
spk11: Yeah, understood, okay. That's all for me, thank you.
spk12: Thank you.
spk10: We'll now hear from Mike Muller with JPMorgan.
spk09: Yeah, hi, just a quick one here. What are some of the dynamics driving the Santa Monica box redevelopment return to be, call it, close to two times higher than the box redevelopment at Scottsdale Fashion?
spk12: Well, extremely attractive real estate, for starters. It's positioned across from the light rail that, you know, prior to COVID delivered 7,000 commuters per day. So there's a great opportunity to do something there. Santa Monica is obviously a heavy tourist community. International tourism has subsided during COVID. We see that starting to tick up, but domestic tourism seems to have almost fully replaced that. And it does feel like my commute's a little bit longer now, so I think the office population, the daytime population is improving here in Santa Monica incrementally. If you look at our project in Santa Monica, relative to the balance, which is Third Street just due north of it, you know, we're able to privately secure, privately maintain our project in a little bit of a different fashion than, say, Third Street Promenade. So I think that is deemed to be a significant advantage as well. We're pretty excited about the uses, you know, ranging from, you know, kind of three to four times a week uses with fitness to co-working. And those two, by the way, of course, interplay with each other perfectly, very synergistic. And then lastly, we're very excited about the destination entertainment use. And we will provide you more details on those as soon as we can once those leases are fully negotiated. But It's really highly coveted real estate is the fundamental underpinning there.
spk08: Well, and I think, Scott, you alluded to this earlier, competition for space. And this is a perfect example of where we had more interest than we had available space. And while our goal was to come up with the perfect mix for the property to generate footsteps to Santa Monica Place, we had the luxury of more interest than we had space. And that, by definition, would drive rate. And I think that's why you're seeing some of the higher returns there.
spk12: Yeah, great point, Doug. I mean, we went through multiple iterations of laying that out with a variety of different uses. So, again, competition creates rent.
spk04: Got it. Okay. Thank you. And we'll now move to a question from Ki Bin Kim with Trist.
spk13: Thank you. Good morning. Just a couple quick questions on the balance sheet. I noticed in your debt disclosure, you talked about the Washington Square Mall and Santa Monica being potentially refinanced this month. Looking at the sulfur and the spread, Washington Square Mall at a 4% spread, Santa Monica at a 1.5%. I'm just curious. I know you don't want to go into too much detail, but just those are two high-quality malls. Why the different spreads? And if I remember correctly, Washington Square was, you know, plus $1,500 square foot sales mall. I'm curious if that's somewhat indicative of what we can expect on a pricing perspective for some of your other future refinancings. Thank you.
spk12: Yeah, good afternoon, Keebin. Yeah, I really can't comment much further at all on Washington Square and Santa Monica and the unique differences between each. You know, the debt markets, you know, some of the lenders do view these transactions as effectively new money going out, so they price it contemporaneously with where they view things are at. I just can't get into the dynamics of each, though. On balance, though, we do feel good about the execution, which is, you know, again, 280 over SOFR. But you can't look at one deal and broadcast it over the entire population. What we're certainly aware of is Every deal is unique and every deal is going to arrive at different terms.
spk13: Okay. Just one question on the Santa Monica loan. Is that price at all benefiting from an option type of agreement that you had previously?
spk12: The maturity on the Santa Monica loan is December of 2022.
spk13: Okay, and this last question, Scott. Was there any benefit from the conversion of cash-based tenancy to accrual this quarter?
spk12: Very little. You kind of see it a little bit in our bad debts, which were marginally positive, less than a million bucks. So you'll see a little bit of it there, but it's not significant.
spk13: Okay, thank you, guys.
spk04: Thank you, Keevan. And we'll now hear from Craig Millman with Citi.
spk02: Hi. I'm just kind of curious, looking at the 2023 debt maturity schedule, any update on where you are with Greenacre or Scottsdale in the process there?
spk12: Yeah, we are in the market. You know, those are two very unique assets, Greenacre's. is one of our very few billion-dollar campuses, which generates a billion dollars of annual sales revenue across the board. So it's everything from major big-box national retailers, household names, to grocery, to traditional mall uses. So it's a bit unique in terms of its makeup and its flavor, and Scottsdale Fashion Square is a top-ten asset in the United States with a huge redevelopment under its belt. luxury momentum and more to come. So those are two unique assets that we are in the market on right now. So we'll continue to report over the next few months our progress on those two.
spk02: Do you think those will be extensions similar to recent deals or would lenders be kind of open to refinance or kind of roll into debt?
spk12: Yeah, again, we're, you know, we're in the market right now, which, you know, means I think they'll be attractive refinance candidates because of the unique nature of them. And I think we'll have other refinance candidates as 2023 rolls on.
spk02: Okay. And then just one quick one on the land sale game that got delayed. Is that under contract and just the timing got pushed out or is that sort of a prospective placeholder in 22 guidance that you guys are now just pushing out in the transaction market?
spk12: It's a specific deal. It's under contract. You know, those deals sometimes take a little time to come to fruition, including getting entitlements in place to provide the uses that the buyer is developing for. So it's just a matter of timing.
spk02: Okay, great. Thank you.
spk12: Sure.
spk10: Our next question comes from Hendel St. Juice with Mizuho.
spk14: Hi, this is Ravi Vey at the end of the line for Hyundai. I hope you guys are doing well. I had a follow up on leasing spreads. Does the denominator include a large portion of COVID adjusted leases or lower base rents for exchange for lower breakpoints on percentage rents? And for your leases signed now and going forward, have you guys reverted back to a traditional lease structure?
spk12: Yeah, the population is everything that's expired in the last 12 months. That's the comparison point versus everything that we've signed in the last 12 months. So, yeah, it's very possible that some of those pre-COVID deals are reflected in that number. And that will continue to be the case. You know, we've been saying for a bit of time that as we continue to convert those deals, which, you know, way back when had a lower fixed rent element and a heavier variable element as we convert those. You know, we'll get a stronger rent structure with fixed rents and annual increases, and that will be the case. So there's a bit of that in the spreads. We can't quantify that for you, but there's a bit of that. We're very much, you know, leasing on a normal basis right now, which is fixed minimum rent with annual increases, fixed common area maintenance with annual increases that are slightly higher than the base rent, and tax recovery. So they're triple net deals.
spk14: Got it. Thanks to the caller. Just one more here. You had strong sales in the quarter, sales per foot. How much of this would you attribute to higher foot traffic? How is foot traffic trended year over year? And would you say that it's foot traffic that's driving the strong sales, or is it inflation?
spk12: Yes. Foot traffic has been really consistent this year, range bound, I'd say, between 95% and 100%. Foot traffic has been very consistent relative to pre-COVID levels. You have a combination of tenants that are performing very well. Luxury has certainly been a category that's performed well for us. You've got just generally a better, a healthy sales environment as we look at all of our categories. I'd say footwear is the only category that's mildly negative and everything else is trending positive. So it's really kind of an across-the-board thing, but our traffic has held up well, and there certainly is some impact of inflation in there as well.
spk14: Got it. Thanks for the call, guys. Thank you, Robbie.
spk10: And we have a question from Ronald Kemdim with Morgan Stanley.
spk06: Hey, just a quick one. I apologize if you addressed this already, but previously you commented on sort of the leasing activity coming in slightly ahead of sort of 2021 levels and potentially getting back to pre-COVID occupancy by the end of 23. Just sort of curious as you're sort of seeing the activity today, does that still make sense? And maybe is that better or worse than you expected at this point?
spk12: Yeah, it still makes sense based on the deal flow that we're seeing today. Doug did provide some commentary that we are not hearing from retailers that they intend to slow or stop their new store expansions. You know, and so we still think that the view is supportable, that we'll get, you know, continue to gain occupancy, and we'll see continued NOI growth into next year and the year beyond. So I think that holds. Doug, anything different?
spk08: Nope. Nothing to add to that, Scott. As I said before, we have a very healthy retailer environment out there, and I talk to the retailers all the time. And, you know, we're not seeing the fallout that you might think, given what's going on in the economy.
spk12: Yeah, just to underscore that, I mean, bricks and mortar is in a great spot, and I think that's a theme that you've heard from our sector over the last few days.
spk06: Great. And then the last one, if I may, just on the financing side, you know, I guess you guys are working through some multi-year extension. Any sort of idea where rates are indicated, where things are looking to shake out in terms of debt costs at this point on those deals? Thanks.
spk12: Yeah, I would say, Ron, on balance, you're talking about secured financings are going to be in the low to mid sixes. You're going to have some that are better. You're going to have some that are worse. It's hard to figure out where that stands on a weighted average basis. Could be more towards the low end of the sixes, but that's probably a reasonable outcome on average.
spk06: Great.
spk12: Thanks so much. Thank you.
spk10: And ladies and gentlemen, that's all the time we have for questions today. I'll turn the call back over to Scott for closing remarks.
spk12: Well, thank you, everybody, for joining us. We continue to enjoy strong operating results during the year and strong demand from our tenant community. We look forward to seeing many of you in person or virtually during our upcoming Investor Day, which is in Scottsdale. It's on November 29th through November 30th. Thank you for joining us today.
spk10: And with that, ladies and gentlemen, this does conclude your conference for today. Thank you for your participation, and you may now disconnect.
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