Macerich Co (MAC) 2023 Q1 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to The Macerich First Quarter 2023 Earnings Conference Call. (Operator Instructions) Please note that today's conference may be recorded.

I will now hand the conference over to your speaker host, Samantha Greening, Director of Investor Relations. Please go ahead.

Thank you for joining us on our first quarter 2023 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 in 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 8-K with the SEC, which are posted on the Investors section of the company's website at macerich.com. Joining us today are Tom O'Hern, Chief Executive Officer; Scott Kingsmore, Senior Executive Vice President and Chief Financial Officer; and Doug Healey, Senior Executive Vice President of Leasing.

And with that, I'll turn the call over to Tom.

Thank you, Samantha. We're pleased to report another strong quarter with our operating results continuing to trend very positively. We again saw robust leasing demand with our first quarter volumes leased being better than the first quarter of last year. And just to remind you, leasing in 2022 was as good as it has been in a decade.

Our portfolio average sales per foot for tenants under 10,000 square feet was $866 per foot, a 3% increase over a year ago. These strong results were achieved even in the very challenging macroeconomic climate we are facing today, including rising interest rates, the threat of a recession and the volatile banking and political environments. Some of the other first quarter results included occupancy at 92.2%, that's a 90 basis point improvement from March of '22, and although a 40 basis point sequential quarter decline over year end, that is very normal. Over the past 15 years, with only one or two exceptions occupancy has ticked down slightly from year end to the following March 31. The range of decline is typically 40 basis points to 100 basis points.

We continue to see strong leasing volumes which are in excess of last year's levels. For the quarter, we executed 256 leases for nearly 1 million square feet. Doug will provide more details in a few moments. Leasing spreads for the trailing 12 months ended March 31 were up 6.6%. Average rent per square foot at quarter end was nearly $64 at $63.98, that's a 2.1% increase over March of '22. We saw very solid same-center NOI growth of 4.8% in the first quarter and that compared to the first quarter of '22 which was a very strong quarter.

Consistent with our strategy to redeploy capital into our top assets and to thin out our non-core assets, yesterday, we sold The Marketplace at Flagstaff for $23.5 million. This is a power center in a non-core market for us. Since year end, we've had a significant amount of financing activity which Scott will comment on shortly. The debt market is still challenging, but our finance team is doing a great job and we're getting our deals done.

Progress continues at our mixed-use diversification and densification projects. Some examples include at Kierland Commons in the Phoenix market, we're moving forward with a 110 unit luxury apartment project. At FlatIron Crossing in Broomfield, Colorado, we're planning a 330 unit luxury multi-family project centered around 2.5 acres of public amenity space, with 50,000 square feet of adjoining food, beverage and entertainment.

At Biltmore Fashion in Phoenix, we're advancing plans for a 250 unit luxury apartment complex, which will be fully integrated into the heart of this open air center. At our flagship Towne Center, Tysons Corner Center, we anticipate receiving approval of our zoning amendment later this year, which will pave the way for future additional mixed-use development on the site of the former Lord & Taylor.

There are also some recent announcements of great new additions to Santa Monica Place, including the Arte Museum, an immersive digital art destination, which will occupy 48,000 square feet on the third level that had formerly been a theater box. We also signed a 10,000 square feet lease with Din Tai Fung restaurant to take over the majority of that area that had been the food court, which is also on the third level of that center.

As Doug will elaborate on shortly, we continue to be very pleased with the strength of the leasing environment. On the heels of a very strong leasing result in 2022, the first quarter of '23 was even better than a year ago. The leasing interest continues to come from a wide range of categories, including health and fitness, food and beverage, entertainment, sports, co-working, hotels and multi-family projects at Kierland, FlatIron, Tysons and Biltmore. Interest continues at levels we've never seen before. Bankruptcies continued to be at a record low. We continue to expect gains in occupancy throughout the year and net operating income as we progress through 2023.

And now, I'll turn it over to Scott to discuss in more detail the financial results for the quarter and significant financing activity.

Thank you, Tom. On to the highlights of the quarterly financial results. This morning, we posted strong core operating results for the first quarter. Same-center NOI, as Tom just mentioned, increased 4.8% relative to the first quarter of 2022, excluding lease termination income. It's worth noting that this follows strong NOI growth averaging 7.4% for the two year period '21 through 2022.

FFO per share for the first quarter was $0.40 which was generally in line with our expectations. The quarterly result was $0.10 less than FFO during the first quarter of 2022, which was $0.50 per share. Primary factors contributing to this quarterly FFO change are as follows:

one, a $12 million increase in interest expense due to rising interest rates, this was consistent with our guidance and our expectations; two, an $11 million decline in lease termination income due to a few larger lease termination agreements executed during the first quarter of last year in 2022, this was also expected; three, a $7 million decline in land sale gains, given a few larger land sale transactions in the Arizona region of our portfolio during the first quarter of 2022, again also expected; and then lastly, a $7 million relative decline in valuation adjustments pertaining to our retailer investments net of taxes. This negative impact from a non-core passive investment was a surprise within the quarter, and it was attributable to a downward valuation adjustment relating to a single retail company.

Offsetting these factors were the following, an $8 million improvement in tenant recovery income, due to leases converting from variable to fixed rent structures with full fixed CAM and tax recovery charges. And secondly, from favorable changes in estimates due to our -- from '22 year end recovery income accruals. And then lastly, roughly $4 million improvement in certain miscellaneous income, including increases in interest expense -- excuse me, interest income, parking income and various other sundry items and events.

We are very pleased with the start of 2023, as reflected by the strong core operating results. At this time, as we disclosed this morning, we are maintaining our guidance for 2023 funds from operations, which is estimated in the range of $1.75 to $1.85 per share. Our 2023 outlook is anchored by strong operating cash flow generation, which is currently estimated at $305 million before payment of dividends. More details of the guidance assumptions are found on Page 15 of the company's Form 8-K supplement, which was filed earlier this morning.

Now on to the balance sheet. We continue to make excellent progress on our financing pipeline, as Tom just indicated. On January 3, we closed a $370 million refinance to the previous $363 million of combined loans that formally encumbered our campus at Green Acres. This five year fixed rate CMBS loan bears interest at 5.9% fixed and is full term interest only.

On March 3, we closed a $700 million refinance at Scottsdale Fashion Square. This five year fixed rate CMBS loan bears interest at 6.21% and is full term interest only. This refinance transaction yielded nearly $150 million in liquidity to Macerich in March. Last week, on April 25, we closed a three year extension of the existing $160 million loan on Deptford Mall. With this extension, we maintain the existing below market 3.7% interest rate and the joint venture repaid $10 million of loan, which was roughly half of that at our share of $5 million.

Collectively, including these three transactions I just mentioned, as well as two loan extensions on Washington Square and Santa Monica Place during the fourth quarter of last year, we've completed five major loan transactions totaling over $2 billion or $1.4 billion at our company's share. At year end, we had a healthy $645 million of available liquidity, including available capacity on our credit facility, for which only $50 million is outstanding today. Debt service coverage is a healthy 2.6x.

Now I'll turn it over to Doug to discuss the leasing and operating environment.

Thank you Scott. As discussed on our last call, 2022 was a record leasing year dating back to before the Global Financial Crisis when viewed on a same center basis. And, in fact, the first quarter of 2023 continued in the same fashion with extremely strong leasing volumes that actually surpassed 2022.

First quarter sales were basically flat when compared to the first quarter of 2022. And this doesn't come as a big surprise given the massive gains we saw in 2021 and 2022 resulting in comps that are difficult to sustain. This was especially evident in the Luxury, Home Furnishings and Jewelry categories. Sales per square foot as of March 31, 2023, were $866 that's up $23 when compared to the first quarter of 2022.

Trailing 12 leasing -- trailing 12 months leasing spreads remained positive at 6.6% as of March 31, 2023. That's an increase of 260 basis points from the last quarter and an increase of 530 basis points when compared to March 31, 2022.

In the first quarter, we opened 194,000 square feet of new stores. Notable openings in the first quarter include three stores with Box Lunch at Stonewood, Superstition Springs and Victor Valley, Garage at Fresno Fashion Fair, Johnny Was and Nike Live at Country Club Plaza, Old Navy at Tysons Corner Center, Cotton On Kids at Scottsdale Fashion Square and Love Sac at Los Cerritos.

On March 3, we opened Life Time Fitness at Scottsdale Fashion Square. This is our second opening with Life Time Fitness, the first being at Biltmore Fashion Park in 2020. At Scottsdale, Life Time is 37,000 square feet spanning four levels topped by a roof top beach club, bistro and lounge all with spectacular mountain views. The club has already sold out its membership and will average almost 1,000 guests a day. Life Time is just another example of our ever expanding health and wellness category and will be an outstanding amenity to Scottsdale Fashion Square. And we look forward to our next opening with Life Time Fitness at Broadway Plaza later this year.

In the digitally native and emerging brands category, we opened Intimissimi at Broadway Plaza, Lucid Motors at The Village at Corte Madera, Madison Reed at Kierland Commons and Rowan at Country Club Plaza.

In the medical category, we opened Northwell Health Physicians and Tribeca Pediatrics, both at Atlas Park. And lastly, in the experiential category, and as recently noted within a Macerich press release, we opened Dr. Seuss and Candytopia at Tysons Corner Center, World of Barbie at Santa Monica Place and The Friends Experience at Lakewood.

Now let's look at the new and renewal leases we signed in the first quarter. In the first quarter, we signed 256 leases for just about 950,000 square feet. This is 20% more leases and 59% more square footage than we signed in the first quarter 2022. And keep in mind 2022 was a record year for us in terms of leasing volumes.

Notable new leases signed in the first quarter include lululemon at Arrowhead Towne Center in Los Cerritos, Boss at Scottsdale Fashion Square, Doc Martens at Tysons Corner Center, Levi's and Swarovski at Los Cerritos and H&M at Queens Center. We also signed seven leases with Cotton On at Chandler Fashion Center, Deptford Mall, Freehold Raceway Mall, The Oaks, Tysons Corner Center and Vintage Fair, in all totaling 21,000 square feet.

Tom mentioned this, but I think it's worth reiterating. In the food and beverage category, we signed two very prestigious restaurants, Din Tai Fung at Santa Monica Place and Elephante at Scottsdale Fashion Square. Founded in 1958 in Taiwan, Din Tai Fung operates 170 restaurants in 13 countries. Known worldwide for its steam pork dumplings, Din Tai Fung will join the recently announced Arte Museum on the third level of Santa Monica Place. And we expect the combination of these two to add a great deal of traffic, energy and excitement to that third level. This is our second deal with Din Tai Fung, the first being at Washington Square which opened a huge fanfare and is incredibly successful.

Elephante is a very hip restaurant/bar that features Southern Italian cuisine with a relaxed Mediterranean vibe. With units already open in New York City, Las Vegas and Santa Monica, Elephante will open at Scottsdale Fashion Square and will flank one side of what will be a newly created porte-cochere in the Nordstrom wing. This new entrance, with elite valet service and other amenities will provide direct access to more luxury including the recently announced Hermes store. And stay tuned for another soon to be announced high-end, nationally known restaurant to complement Elephante on the other side of the porte-cochere.

In the Digitally Native and Emerging Brands category, we signed leases with Charly and Mango at Los Cerritos, Evereve at Broadway Plaza and The Village at Corte Madera, Gorjana at Biltmore Fashion Park, Intimissimi at Santa Monica Place and Maje and Sandro at Fashion Outlets of Chicago.

We continue our effort in addressing 2023 lease expirations as early in the year as possible. In doing so, in the first quarter we signed over 175 renewal leases with almost 110 different brands totaling approximately 679,000 square feet.

So with that, we now have commitments on 67% of our 2023 expiring square footage of space that is expected to renew and not close, with another 20% in the letter of intent stage. By, comparison, at this time last year we had 56% of our 2022 expiring square footage committed. In addition, we believe our renewal retention rate for 2023 lease expirations is tracking in the high-80% range. All of these are very strong metrics and, as I've stated before, given the noise and uncertainty that exists in the macro-economic environment, I remain pleased with these metrics as we are basically taking a great deal of risk off of the table in 2023.

Turning to our leasing pipeline. At the end of the first quarter, we had 158 signed leases for 2.3 million square feet of new stores which we expect to open in 2023, 2024 and early 2025. In addition to these signed leases, we're currently negotiating leases for new stores totaling nearly 390,000 square feet which will also will open in 2023, 2024 and early 2025. So, in total, that's nearly 2.7 million square feet of new store openings throughout the remainder of this year and beyond.

And, again, I want to emphasize, these are new leases with retailers not yet open and not yet paying rent. And these numbers do not include renewals. And let me take just a moment to add some color to this pipeline, by naming a few of the retailers and concepts coming soon to our centers later this year, into 2024 and early 2025. Scheel's All Sports at Chandler Fashion Center; Target at Kings Plaza and Danbury Fair; Arte Museum and Din Thai Fung at Santa Monica Place; Caesar's Republic Hotel, Hermes and Elephante at Scottsdale Fashion Square; Lifetime Fitness, Pinstripes and Original Joe's at Broadway Plaza; Dillard's flagship at South Plains Mall; Round One at Arrowhead Towne Center and Danbury Fair; Primark at Green Acres, Tysons Corner and Queens Center; Zara and H&M at Queens Center; Lidl at Freehold Raceway Mall; Industrious at Kierland Commons; Kiln at San Tan Village; Bonesaw Brewery at Freehold Raceway Mall and Deptford Mall; Ashley Furniture at Kings Plaza; and a new and expanded flagship Apple store at Tysons Corner Center which will open later this month on the 22th anniversary of their first ever bricks and mortar store, which was also at Tysons Corner Center. And this long list goes on and on and on.

So the leasing pipeline of new store openings now accounts for almost $64 million of incremental rent, in aggerate, which will be realized in 2023, 2024 and 2025. And this incremental rent will continue to grow as we continue to approve new deals and sign new leases.

So, to conclude, our leasing and operating metrics were very solid in the first quarter. Leasing volumes were extremely strong, out pacing the first quarter of 2022 in terms of number of leases signed, square footage and total annual rent, thus maintaining a very strong pipeline of stores that will open this year, next year and beyond.

As expected, occupancy decreased a bit in the first quarter but is up 90 basis points from a year ago. Leasing spreads came in at 6.6% and should continue to increase as we increase occupancy. Sales remained on par with the first quarter of 2022, with the first quarter of 2022 showing very strong comps to first quarter of 2021. Bankruptcies overall remain at their lowest levels since 2015 which is consistent with our significantly reduced tenant watch list. Therefore, we remain optimistic as we look at the remainder of this year, next year and beyond.

And now I'll turn it over to the operator to open up the call for Q&A.

(Operator Instructions) And our first question coming from the line of Derek Johnston with Deutsche Bank.

I never do this, but I have to actually say something because I've never really seen this meaningful of a dislocation between sound fundamentals and depressed valuation. So I was making sure we're not missing anything. When you talk about leasing, and very strong leasing in first quarter. Firstly, I was wondering if -- and I'm sorry if I missed this. What percentage of the leasing came from new tenants? And then the second part of this question is, are you seeing any slowdown whatsoever given the macroenvironment?

I can take first one. It's Doug. So we signed 256 leases in the first quarter. About 31% of those were new leases with new retailers and about 69% were renewal leases. And then to your question about do we see any slowdown, I think the quick answer is no, we're not. And I know it's kind of counterintuitive given everything that's going on in the environment out there, but we're not seeing it.

Leases we have signed, the tenants are still opening stores. The leases we have negotiated or are negotiating, tenants are not(added by company after the call) pulling back. And I think we have a really healthy retailer environment out there. If you think about pre-pandemic, there are a lot of retailers that were struggling, many failed -- most failed during the pandemic, and those that came out of the pandemic came out very, very healthy. So I think it's a testament to the retailer environment, but I also think it's a testament to our portfolio of shopping centers. We do have must-have shopping centers that these tenants want to be in.

Derek, I'm a little bit more cautionary, as it relates, it's a great environment. I'm incredibly glad that we've got a very strong pipeline, because those are contractual deals that'll start to pay rent in '23, '24, and beyond as Doug mentioned. But every time, the Fed has behaved the way they're behaving now, bumping rates if you go back to 1955, a recession has followed. And I have no reason to believe this is going to be an exception. We saw their action again yesterday. And so there is pressure. I do think we're probably likely headed for a recession. But we're in a very, very good position to weather that and a lot of the things that typically -- bad things that typically happen in a recession like retail failures, as Doug mentioned, that happened during COVID. So we've never really frankly had a recession that's following the pandemic. And this one could be little -- a little unique, and I think we're very, very well positioned for that.

That being said, we open every leasing call we have. Every two weeks, we meet with the entire leasing team, it's the executive team, the leasing team, and we always challenge them what weaknesses are you seeing, are your retailers backing off on their open to buys. And in their view, there is no slowdown, there is no back-off and the deal is just continuing to flow in at a very strong pace.

And that makes perfect sense. All that said, I was encouraged to see Flagstaff disposed. Are you seeing any tightening in the private markets and potentially other interest in some of your non-core assets? Given the Fed's pause, do you think volumes may be poised to pick up in the second half and that's an opportunity?

Well, Derek, as you know, we're an opportunistic seller. We sold 25 lower quality malls coming out of the financial crisis. Typically that market gets better when there is more debt available. And obviously, as you heard from Scott and others, the capital market is tough right now, the debt markets are tough, and most of those buyers tend to come in and be leveraged buyers. So I think we'll get a deal done here and there in this environment, but when capital markets get back to a normal type range in capacity, I think we're going to see more transactions. But I don't really foresee that for 2023.

Great. And just one real quick last one for me, and I know I can look it up. But when the Scheels come online and Caesars Hotel? I think they're probably in the beginning of '24 if I'm mistaken, but any update would be helpful.

Derek, Scott here. September 30, 2023, for Scheels, so right around the corner. We're excited about that one certainly. So Caesars Republic, we expect during the first quarter of '24.

And our next question coming from the line of Greg McGinniss from Scotiabank.

Hope you're all doing well. So given the strength of the asset, I guess a little surprised by the fixed rate on the Scottsdale loan, though, to be fair, we don't really have many other Class A plus secured debt comps. So any color on that process, and maybe the LTV would be appreciated. And can you also share some early thoughts on the Tysons' debt maturing in January and expectations on what you hope to achieve there?

Sure, Greg. Scott here. So yes, Scottsdale, we got done at the beginning of March. And if you were tracking what was going on in the market was an extremely volatile time. We actually hit a pretty fortunate window, given the fact that about two or three weeks later, the regional banking failures started to occur. So I have every reason to believe that if we hadn't hit that window, we probably would not have been able to close that deal. So during -- relative to what we were talking about at Investor Day, where we said I think -- said our expected interest rate would be in the mid-to-high 5s over the course of the next few months, credit conditions just became much more volatile, the Fed continued to pump rates which caused credit market spreads to gap out. So that's really what contributed to the 6.2% interest rate. But I'll say that we hit a window. We certainly hit a window there, so I feel good about that.

Tysons Corner is very well positioned. There is a lot of great things going on, fantastic leasing activity. If I looked at the existing debt today, it has a very healthy debt yield, roughly about 13% plus. So I think there's an opportunity there to potentially even upsize it. It really depends on what the credit conditions are going to be like at that point in time. We will not be going to market on that until mid-summer, though, so it's a little too early to speak to it.

Okay. I guess the follow-up here. So there's clearly a healthy level of leasing demand and growing occupancy. Are you getting any interest from institutional investors or developers where you might be able to partner or sell some larger parcels to get more aggressive on leverage management? I mean, is there a desire to go on the offensive there? Or do you feel the best path forward is just growing EBITDA?

Well, on that Greg, whenever we do a multi-family densification, for example, we always consider bringing in a partner -- a multi-family developer partner in which case we would do -- we can do at a variety of ways, the one way would be to contribute our land to the venture. So it's not necessarily taking cash and paying down debt, but it will drive up EBITDA which gets you to the same place. So those things we're considering. I think Scott has mentioned previously, we've been fairly active in selling available land that we have in our portfolio and we've got some of that reflected in our guidance this year. So I think you'll see us do more of that rather than coming in and trying to sell off big blocks and parcels to other.

And just a final one from me. So we've read a headline that Deptford was actually sent to special servicing. And given that you ultimately secured an extension there, could you just talk a little bit about that process and maybe your willingness to walk away from the asset, level of demand that you're seeing for mall debt of that quality level? And then what you see is kind of your negotiating leverage given what appears to be -- I assume to be, sorry, limited demand by lenders to actually take over any malls?

Yes. So Deptford Mall happened to be a CMBS loan, as a matter of protocol, special servicers are the only ones that have the ability to approve an extension. So the mere transfer of a loan to special servicing is really just a function of process and that's all. So it was a very amicable process by which we secured that extension, again three years at a very favorable 3.7% interest rate.

In the process of securing extension was really a function of what the credit markets were like at that point in time, given not necessarily conditions and just the mall space, which is broader conditions within commercial real estate and a lot of the friction that's resulted from the regional banking failures. It just was not an opportune time to take that asset to market. That said, it's extremely well positioned, very healthy debt yields, and in a normal credit environment, for instance, the first half of 2022, we would have been able to finance that asset with these. So again, that was just a function of seized up credit market. It was a very well positioned asset and a very amicable process.

And our next question coming from the line of Lizzy Doykan with Bank of America.

The same-store NOI growth accelerated in the quarter and operations looks pretty good. I'm just curious to hear where you see the most variability still that's causing you to maintain full year guidance or simply a function of it being still early in the year? Just wondering what the reserves are around specific items for the remainder of the year.

Yes, sure. Yes, we're very pleased with the way same-center NOI started the year, nearly 5% growth. It is very early in the year. I highlighted a couple of things, not only the strong core growth, but also the offsetting decline in one of our retailer investments. And so, we've got nine months ahead of us, we'll continue to assess guidance. It's very possible that our core growth will continue and we'll be bumping that. We're just going to wait to see as the next few months unfold and come back to you at this time at the end of the second quarter.

And in terms of reserves, just given the relatively healthy environment that we're seeing, we feel like we're very adequately reserved. Excuse me, as I look at the bankruptcy environment, we still expect extremely low levels relative to history, certainly relative to 2020 during COVID. I went back and quantified the bankruptcies that are really getting a lot of press right now, those being Bed Bath & Beyond, Tuesday Morning, David's Bridal, Party City. I think there's over 1,800 stores that are primarily affecting open-air power centers and community centers. We have only two leases within those 1,800 that are subject to bankruptcy. So, again a very healthy environment. Not to say that there won't be any further bankruptcies or fallout, but I think we're very well reserved on that front.

That's helpful. And this is just a little bit smaller to make note of but, just noticed management operating expenses seems to tick a bit higher this quarter. I'm just wondering if there's anything worth noting around that, or just if you could provide more color.

Yes. I don't think there's anything unusual. It was in line with our expectation. It is a new year, so with any organization, you've got promotions and compensation adjustments. And so, that's really what's in there. I don't think there's anything unusual in that number, but it was in line with our expectation.

And our next question coming from the line of Samir Khanal with Evercore ISI.

I guess a question on retailer sales growth this year. I mean, what are you guys budgeting for this year as we think about percentage rents?

Yes. For percentage rents, we're assuming flat. It's hard to say what the balance of the year will bring, and we felt good conservative assumption was to assume flat. Of course, it's hard to predict what any given retailer will do, oftentimes percentage rents are going to be driven by a couple of major factors. One, luxury tenants are certainly going to drive a good portion of those percentage rents, so we'll see what the balance of the year unfolds there. There is a little bit of comparable pressure on the luxury sector that Doug outlined in his opening remarks.

So that's not to say that they're not performing extremely well, but I think they're up against a difficult comp in the first half of the year. But we do expect generally, percentage rents to continue to decline. In my opening remarks, I mentioned, we're seeing a pickup in our tenant recoveries as our leases convert from more variable rent structures driven by pandemic-era negotiations to longer-term fixed rate deals with fixed CAM and tax recoveries. So we will see percentage rent -- variable rent continue to decline primarily due to that.

Can you -- are you able to sort of quantify that or maybe ballpark in terms of how much of a decline in terms of percentage do you think?

I'd say ballpark mid-teens relative to 2022 would be our current expectation.

Okay, got it. And then my next question is, I guess more of a modeling question. But there was a loss on the JV income side. Was that primarily due to the valuation adjustment? I just want to make sure that we don't carry anything forward into the model here.

Yes, two primary things. One was that valuation adjustment that I mentioned. Secondly, we also may be acquiring our partner share of certain assets within an existing joint venture. As a result, that triggered to shorten holding period and an impairment event, and then we recognized a $50 million impairment charge. That is in unconsolidated JV, so that's showing up there as well. We can't speak to the specifics of that transaction or the partnership, but that was also a factor that you're seeing in the numbers.

Got it. And then last one for me on this power center that you sold, what was the cap rate on that? I'm sorry if I missed that.

Yes. Samir, we're subject to a confidentiality agreement, so we're not going to get into the cap rate discussion. But Scott mentioned in his guidance comments that it's neutral -- he is going to keep guidance the same, so that transaction is effectively neutral. So if you consider what our use of proceeds would be on something like that, you can kind of get in the ballpark of what a cap rate might be.

And our next question coming from the line of Floris Van Dijkum from Compass Point.

Obviously, encouraging leasing progress in terms of your leased occupancy increasing by 80 basis points. Doug, you talked a little bit about your [S&O] pipeline in terms of square footage and in terms of dollar amount. But in terms of percentage, obviously, that square footage is much bigger than the difference between the physical occupancy and the leased occupancy. If you could just -- you had previously mentioned about 200 basis points gap between physical and leased occupancy. Is that still about the same?

Floris, Scott here. It's actually a little bit higher, it's in the mid-3s right now and that's really a function of just a very robust pipeline. And openings typically don't occur until the latter half of the year. It's just -- actually, there's two kind of waves in our business. One is opening for summer. So we'll see probably a greater amount of openings in 2Q than we did in 1Q. And then we'll see a bunch obviously open up in preparation for the holiday 2023. So we've seen the difference between physical and lease grow to roughly about 3.5% right now.

That's certainly encouraging, and particularly that should make you feel good about growth later on this year. Maybe if you could also touch upon luxury as a percentage of your A malls today, and where you could see that growing. Obviously, when we -- when you had your Investor Day, we looked at Fashion Square, and saw that luxury there, it's going to be over a quarter probably of the total GLA. Maybe if you can talk a little bit about the trends that you're seeing across the portfolio, and how long that will take to play out as some of these luxury leases presumably take a longer time before they actually take occupancy.

Yes, Scottsdale Fashion Square is a very unique asset. It's very few places in the country, very few centers in the country, are you going to be able to populate a center with that much luxury. So, overall in our portfolio, it's probably along the lines of 5% depending on how you define the luxury category. And not every center is really going to have that. I mean, we have some great centers in our top 10, where you're not going to have any luxury. It's still going to be an incredibly successful center doing over a $1,000 a foot. And all you have to do is, go back to a few prior supplementals when we ranked all of our assets based on sales per foot and you'll see what I mean.

So it was a strong category, it came raging back after COVID, we saw some great results, particularly at Scottsdale Fashion Square. But that can't necessarily be extrapolated into every center, because luxury is kind of very selective and it's not going to be in every property.

Fair enough. But would it be fair to assume that, that percentage could potentially almost double over the next couple of years in your centers? I mean, it's still relatively small amount presumably. And maybe Queens doesn't have that, but some of your other malls like obviously, Fashion Square and Washington Square presumably could.

Well, there are some others that are candidates that we're considering, but that's going to move pretty slowly. If we're at 5% today, I wouldn't expect to double it in the next five years. It's going to be a slower process than that. But they have a pretty big impact on the center and they affect a lot of the tenants around them. So there's a lot of collateral benefits when you bring in, even just a handful of luxury names.

Great. Maybe last, billboards. I know that you had -- the massive billboard at Fashion -- at Scottsdale up and running during the Super Bowl. How much more expansion could you see in that kind of income going forward?

That's a great question, Floris, because the demand for that type of space keeps growing and growing and growing, and we see it everywhere. I mean, we see it at Fashion District of Philadelphia, we see it at Santa Monica Place. Obviously, you saw at Scottsdale. And it's going to continue to grow, and I think be a strong incremental revenue for us as there's a nominal amount of capital required to make that happen, but there's a fair amount of demand and it keeps growing. So, I think that's going to continue to be growing and more impactful part of our revenue stream as we go forward very near future.

And our next question coming from the line of Linda Tsai with Jefferies.

Besides the timing of Scottsdale Fashion Square refinancing being fortuitous, any other additional color on how the regional banking issues might be impacting your refinancing plans for this year?

Yes. Linda, there -- it's difficult to predict where they're going to be in six months from now. I mean, I look back to the pandemic, and in the summer of 2021, there were no transactions getting done. By the time we got to the fall, mall transactions were getting done, and over the course of the next 18 months leading through spring of 2022, I think there were about $8 billion to $9 billion of regional mall transactions. And so over a very short period of time, the market changed rapidly, and again the pandemic was the source of the turmoil then.

So it's really going to be driven by what continues to happen in this space, so obviously, there was a major regional banking failure just last week, and then there's some other names that are in the news, I'm not going to get into. But the longer that continues, the more skittishness there's going to be in primarily the CMBS markets. But frankly, a little bit on the balance sheet markets too as balance sheet lenders look at their own exposure. So it's hard to predict, but what we've seen is the markets are very elastic, and once conditions start to settle, there is a fair amount of liquidity, once you start to get comfortable at what the right entry point is for a lender, for a creditor, I think we'll start to see the markets rebound.

Certainly, we are coming hopefully, knock on wood, towards the end of the Fed rate hiking cycle, and that will certainly function as a catalyst. It's just a matter of whether or not there is any other macroeconomic or macropolitical events that are going on at that point in time, hard to predict.

And then does your year end leverage target remains 8.4x, and do you expect to issue equity to get there?

Yes, I think that's a good target mid-8s. And I would say we could get to mid-8s which is organic EBITDA growth. We can improve upon that if we were to issue equity. But I don't think there's any appetite given that we're sitting on $650 million of liquidity and a significant amount of operating cash flow, really no need to raise equity at extremely discounted valuation. So, I think we can get to the mid-8s just organically with the NOI growth and seeing our same-center -- excuse me, our signed but not open pipeline start to open.

And our next question coming from the line of Alex Goldfarb from Piper Sandler.

So two questions. One, not sure if the $50 million impairment that you spoke about is the Philly Fashion District, but just a question on that project. The partnership loan that you guys have been funding to pay down the first mortgage, and I guess the term loan expires January 24. Can you just go over the sort of capital structure on here? Because that partner loan accrues at 15% which needs to be paid before you guys get your equity? But you're funding the partner loan, so it's sort of the same, it's one pocket or the other. But just sort of curious how this project you're penciling it now versus when you originally underwrote it? And where it stands given that you've been having to pay down the first mortgage with your own capital?

Yes. So effectively, all the economics of that joint venture go to us, Alex, as a result of that. And look, when we underwrote that asset, it was in 2017/2018, it was before COVID, and obviously, a lot of urban areas, including Philadelphia have been slow to recover in terms of the office population, and FDP has been no exception.

So as we look at that, it's a project that we think is going to improve over time as we continue to lease up. As you know, we've announced that we're working with HBSC on a potential arena site and 1/3 of that location, which is very promising and would help the entire community there, not just the retail, but the entire area. And that's still something that's in process, and we're very optimistic. But obviously, the returns today are not what we expected when we bought that asset in 2016/2017.

But you feel comfortable that the loan and your equity investment that you've put in that you'll recover.

Yes. And there's not a lot of -- well, I'll turn it over to Scott in a second. There's not a big loan balance on there. As we paid that down, that just means there is more cash flow available to us after debt service, and we have every expectation to continue servicing that debt and funding the pay downs.

Yes. No, that's it, Tom. I mean, I think the most recent paydown you saw, which was $25 million to $26 million, that was simply an embedded -- an extension, right, that was tied to some economic hurdles. So it's just the overall process of delevering that asset and reducing our own leverage, but that's what you're seeing there.

Okay. And then the next question is, you mentioned the tech investment that took a bad hit in your portfolio. Can you just give some color on what the total Macerich investment is in the tech venture? And what the ultimate -- do you expect to ultimately harvest these? Or are these being done sort of operationally concurrent with the portfolio? Basically, is this -- are these investments trying to enhance property operations and there are sort of things that you are keeping? Or are you expecting at some point, these are independent concepts that ultimately will be sold or acquired or what have you?

Alex, that investment is through a venture capital firm, Fifth Wall, and that was an investment we made about six or seven years ago. It funded periodically, but that's when the commitment was made, and it was primarily investments in digitally native brands. And it was really a strategic partnership between ourselves and Fifth Wall to give us access to a lot of the emerging and digitally native brands. They did the underwriting, and it helped us really focus on the ones that they and we thought would be the most successful and would benefit Macerich.

So that's the origin of that investment. It's not really ongoing investments. It's something we committed to seven years ago. And we've had some winners that have gone public via SPAC, where we've reduced our investment, and we've had others that haven't done as well, which is what you would expect from a venture capital investment, some winners and some that don't make it. And that's where I think the original investment was about $75 million, and we're probably -- our investment on the books is probably down closer to $50 million today based on either write downs we've taken or on the other hand buyouts we've gotten by virtue of some of these retailers going public.

So you don't have sort of a return like an ROI or IRR or something that you can talk about you. Do you?

No. Nothing that we've disclosed publicly, Alex. But we're very happy with the investment. It's been great strategically and the return has been good as well.

And our next question coming from the line of Ki Bin Kim with Truist.

So I just wanted to turn to your guidance for a second. Can you update us on how much land sales are embedded in your '23 guidance and also interest expense?

Sure. I think I answered that question in the first quarter -- excuse me, the fourth quarter call. And I think the answer is pretty much the same right now. We had about $0.09 of FFO benefit from land sales, net of tax, the tax provision, and that was in 2022, and I mentioned I think a few months ago, I expected about 40% to 50% of that activity hitting FFO in 2023, and I think that's probably still in line 40% to 50% of what we experienced in 2022. So that should help you out there. We recognized about $0.01 of benefit in the first quarter, so it was kind of level relative to the guidance I just gave you. And those are going to be lumpy as the year progresses. Interest, we have provided guidance. No reason to modify the guidance at this point. I think our interest guidance is sufficient. We'll continue to address that as well as all the other line item guidance as we move forward.

Can you remind us what that interest expense guidance was?

It's on Page 15. And I want to say, it was roughly $322 million. But Page 15 -- $320 million.

Okay. And just a second question. Going back to your debt refinancings, Danbury Mall, Niagara and couple near-term debt maturities, any kind of sense of what kind of proceeds or interest rates we should expect?

Yes. I really don't want to speak in detail about any given transaction because we're actually having active conversations with lenders, so it's probably not appropriate. But I would say market rates today are in the 6% realm. And you can see what we did at Green Acres and Scottsdale, that'll give you an indication. So that's kind of what the market going rate is. That's probably all I'm at liberty to talk about right now, just given those are active deals.

And our next question coming from the line of Michael Mueller with JPMorgan.

Scott, I was wondering, can you give us some color on how you think recovery should be trending now that occupancies are higher? I think pre-COVID, it looks like they were about in the low-90s. I think last year, it's about 75%, and so far this year it's a little higher than that, maybe low-80s. But just any color there would be helpful.

Yes. I think we're making pretty good progress and some of that I've highlighted already in some of my commentary. We saw it tick down during COVID, because we were doing, in many cases, some of those renewals were locked in at rates that we frankly didn't want to lock in long-term, nor did our tenants, given the uncertain environment. So some of those -- not all of them, but some of them were variable rent structures with very little to no CAM. And oftentimes we're recovering our taxes. Fast forward to today, we're getting full triple net deals done with fixed CAM with annual escalators, and full tax pass-through. So our expectation is we're going to start trending back to that low-90% recovery rate that you were just commenting on pre-COVID.

And is that something you could trend to in a few years do you think?

No, I think that's something that we'll get to probably within the next year to 18 months or so.

And our next question coming from the line of Ravi Vaidya with Mizuho.

Hope you guys are doing well. Just had one question here. We saw some data from Placer, that said that foot traffic in closed malls and regional malls was down about 7%, 8% year-over-year in March. I was wondering, if you guys have any stats on how foot traffic in your portfolio has trended in March and in April?

So we look at it more on a quarterly basis or trailing 12 months, and traffic has been fairly consistently at about 95% of pre-COVID levels. So sales have recovered. Sales are well in excess of pre-COVID levels. Traffic is a little bit lower, but the consumers coming and shopping with a purpose probably having done some research online before they get to the town centers. So sales is the really important trend, traffic is less accurate I would say. But at 95%, we're still pretty pleased and comfortable with that.

We think as a result of some of these new non-traditional retail uses that Doug mentioned, like Scheels Sporting Goods, for example, Arte Museum. Once some of those deals that are signed and in the pipeline, but are not open yet. Once they open, we think that they're going to be big traffic generators, that our numbers will easily surpass what we were seeing pre-COVID.

And our next question coming from the line of Caitlin Burrows with Goldman Sachs.

I was just wondering if we look at minimum rents, it seems like with occupancy up and rent per square foot is up, I know leasing spreads have all been positive but some surprise at minimum rents were down. So I was wondering if you could go through kind of what else we should be considering and what's driving that?

Well, I think if you look at a minimum rent across both consolidated and unconsolidated assets, you'd see that they're actually up, Caitlin. Maybe look at some of the disclosures that are in the 8-K supplemental which kind of breakdown leasing revenue between its various components. There's a lot of revenue line items that are sitting there in the leasing revenues. So for instance, termination income is down significantly. That's going to cause a decline, so I'm not sure if that's getting captured, if your eyeball is kind of capturing that. But, in fact, minimum rent is actually up a few million dollars quarter-over-quarter.

I think, when I was giving initial guidance about three months ago, I said, one of the factors is, we are taking some pretty high-rent space offline, primarily in some of our New York assets, and a lot of those benefits are sitting in our signed, but not open pipeline in terms of the deals that will replace some of the space that's coming offline. So as you're taking high-rent space off, you're going to see some friction there. But it is really just add its transitional vacancy and we'll see the pickups later on as those spaces come online. So those are few comments, but I can tell you that if you look at all of our assets at our share, minimum rent is actually increasing quarter-over-quarter.

Okay. Yes, I mean, I was just thinking because when we -- occupancy, I mean, correct me where I might be not understanding it, but occupancy, I think is up year-over-year and rents are up year-over-year. So if I look at Page 14 in the supplement, it breaks out total leasing revenue between minimum rents and it goes through consolidated and unconsolidated, and the company's total share, and now it's $188 million, and last year it was $194 million. So those are the numbers that I was looking at, but maybe it sounds like it's timing.

Why do we take it offline, because may we can kind of compare notes and kind of help you out with your answer there?

Okay. And then maybe just secondly thinking of redevelopment projects, I know you guys have Santa Monica Place and the Scottsdale redevelopments. Do you guys have other small redevelopment projects going on now for anchor boxes or otherwise?

Yes, we certainly do. I mean they're not extremely material, so they don't end up in our pipeline. But we've got quite a few exciting openings coming, for instance, Scheels All Sports doesn't show up in our development pipeline, some of the Round One deals, Lifetime Fitness deals don't show up in our pipeline. But those are effectively anchor positions for us. They just don't rise to the order of magnitude of the development costs being material enough to land on the pipeline. So all that is embedded in the $64 million that Doug spoke of earlier, that will be coming online this year and into next year.

Thank you. And I will now turn the call back over to Mr. Tom O'Hern for any closing remarks.

Thank you. Well, thank you for your time today, everyone. Appreciate it. We're pleased to report a strong start to the year, and we look forward to seeing many of you at NAREIT next month. Again, thank you for joining us today.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.