The Macerich Company (NYSE:MAC) Q3 2023 Earnings Call Transcript October 31, 2023
The Macerich Company misses on earnings expectations. Reported EPS is $-1.1689 EPS, expectations were $0.44.
Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Third Quarter 2023 Macerich Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Samantha Greening, Director of Investor Relations. Please go ahead.
Samantha Greening: Thank you for joining us on our third quarter 2023 earnings call. During the course of this call, we'll be making certain statements that may be deemed forward-looking within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995, including statements regarding projections, plans, or future expectations. Actual results may differ materially due to a variety of risks and uncertainties set forth in today's press release and our SEC filings. 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 in the Investors section of the company's website at macerich.com.
The exterior of a modern shopping center, with its clean lines and well landscaped outdoor areas.
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. With that, I turn the call over to Tom.
Tom O’Hern: Thank you, Samantha. It was another strong quarter for us. Leasing volumes continued at a record level. We had a 130 basis point gain in occupancy compared to a year ago and 80 basis points gain over the last quarter. That brings our occupancy at quarter end to 93.4% and we are getting very close to our pre-pandemic level of 94%. We continue to see real strength in the leasing environment. On the heels of a very strong leasing result in '22, the '23 leasing environment has been robust. Store openings are accelerating. During the third quarter of '23, we opened nearly 500,000 square feet more than during the third quarter of '22. That included SCHEELS Sporting Goods at Chandler Fashion Center, Life Time at Broadway Plaza, Target at Kings Plaza and Primark at Green Acres Mall.
Across many categories, leasing demand is at levels we have never seen before. So, the densification and diversification of our high quality portfolio of town centers continues. As a result of the very strong leasing activity in '22 and '23, we have a very large and healthy leasing pipeline. We have over 2 million square feet in that pipeline of leases that are signed but not yet open. Once those tenants open, it will fuel our '24 and '25 same center NOI growth. Most of our key operating metrics continue to trend very positively. Our average base rent was $65.40, up 2.8% compared to a year ago. Our portfolio average sales per foot for tenants under 10,000 square feet came in at $849 a foot, a very strong level albeit slightly lower than a year ago and that was mainly due to slower EV sales compared to 2022.
We had double-digit positive re-leasing spreads for the quarter, up 10.6% on a trailing 12-month basis and up 11% in the second quarter of '23. So that was two consecutive quarters, very strong spreads. We had a 4.8% growth in same center NOI, that's 5% year-to-date and bankruptcies continued at a record low with only three small bankruptcies during the third quarter. We are very optimistic about our business for '24 and beyond. As we open more of our diversified uses as evidenced by recent openings at SCHEELS Sports at Chandler, Life Time Fitness at Broadway Plaza and further fueled by the 2024 opening of Arte Museum at Santa Monica Place, we expect consumer traffic and total center sales to grow meaningfully. And now I'm going to turn it over to Scott to discuss in more detail the financial results for the quarter and recent financing activity.
Scott Kingsmore: Thank you, Tom. This morning, we again reported very strong core operating results for the third quarter. Same-center NOI increased 4.8% versus the third quarter of 2022 excluding lease termination income and year-to-date same-center NOI growth, excluding lease termination income is positive 5%. FFO per share for the quarter was $0.44, which was $0.02 less than FFO during the third quarter of 2022 at $0.46 a share, and the $0.44 was in line with consensus for the third quarter. The primary major factors contributing to this quarterly FFO per share change are as follows: One, a $12 million, $0.05 increase in interest expense due to rising interest rates; two, a $3 million or roughly $0.01 decrease in land sale gains relative to the third quarter of 2022.
And then offsetting these factors were a positive $9 million change or $0.04 gain in rental revenues, which includes a $7 million increase in top line minimum rent, a $4 million increase in recovery revenue and an offsetting $2 million decline in percentage rent. Once again, these changes are driven by improved occupancy, growth in rental rates and also by a continued conversion from variable rent to fixed rent structures with CAM and tax tenant recovery charges. So we're very pleased with our core NOI growth during 2023 thus far. As we disclosed this morning, we are maintaining the midpoint of our guidance for 2023 funds from operations which is estimated in the range $1.77 to $1.83 per share. We are also reaffirming the range of our estimated same-center NOI growth, which is 3.75% to 4.5%.
Our 2023 outlook continues to be anchored by strong operating cash flow generation, which we estimate will be over $300 million before payment of dividends. More details can be found on Page 15 of our Form 8-K Supplemental Financial, which was filed earlier this morning. During the third quarter, we successfully renewed our corporate credit facility. We increased liquidity and capacity on the new facility by $125 million to $650 million and that was up from a prior capacity of $525 million under the former facility. We secured refreshed term for roughly 4.5 years through February 1, 2028, and facility pricing remains unchanged at SOFR+ 2.35%. We are extremely pleased with this execution, especially in light of an extremely challenging bank credit market.
We are currently in the process of refinancing 2 maturing joint venture asset loans at Tysons Corner in Northern Virginia and at the Boulevard Shops at Chandler Fashion Center in the Phoenix marketplace. Tysons Corner is expected to be approximately $710 million in total proceeds, half of which is at our share. And Boulevard Shops is expected to be a $24 million loan, also half of which is at our share. We recently defaulted on the early October nonrecourse loan maturity of the Fashion Outlets of Niagara. Due to pending loan defaults for both the joint venture owned Country Club Plaza as well as Fashion Outlets of Niagara, GAAP requires a revaluation of each asset due to the probability of a shortened holding period. As a result, we recognized substantial impairments on both assets within the third quarter totaling just over $250 million.
These impairments impact net loss, but do not impact funds from operations. GAAP also requires that we accrue default interest on these nonrecourse loans, as well as on Towne Mall, which is currently in receivership. We do not expect to pay any accrued default interest on any of these, three nonrecourse mortgage loans, which is expected to be reversed once the loans are either restructured or once titled to the underlying mortgaged asset is transferred. We have therefore made an adjustment within our FFO tables to show both the impact with and without this accrued default interest expense. To be clear, we do continue to recognize and deduct from FFO the interest expense at the loan regular interest rate. Only the incremental default interest expense is added back within our FFO tables.
Please note that given the confidentiality of ongoing negotiations and discussions, we are not in a position to address the status of either one of these loans at this time. We currently have approximately $665 million of liquidity available today, including $515 million of capacity on our new revolving line of credit facility. Now, I'll turn it over to Doug to discuss the leasing and operating environment.
Doug Healey: Thanks, Scott. As Tom mentioned, leasing was very strong in the third quarter both in terms of volume and reporting metrics. Sales were down 1.8% on a rolling 12-month basis. And as discussed last quarter, not a real surprise given the gains we saw in 2021 and 2022. Trailing 12-month leasing spreads remained positive at 10.6% as of September 30, 2023 and that's an increase of 400 basis points when compared to September 30, 2022. When compared -- when coupled with the second quarter, trailing 12-month leasing spreads have actually averaged 11% for the past six months. In the third quarter, we opened 740,000 square feet of new stores which is 3x the square footage we opened in the third quarter of 2022. This brings our year-to-date total store openings to just over 1.2 million square feet, which is about 80% more square footage than we opened during the same period in 2022.
In addition to the openings of SCHEELS All Sports at Chandler, Life Time Fitness at Broadway and Target at Kings Plaza that Tom mentioned earlier, there were several other notable openings including Chanel Beauty at Broadway Plaza, Dr. Martens at Los Cerritos and Tysons Corner Center, Johnny Was at 29th Street, Levi's at Arrowhead, Pandora at The Oaks, Tillys at Valley River and 4 MINISO stores at Arrowhead, Chandler, The Oaks and Vintage Faire. In the emerging brands category, we opened Arc'teryx at Tysons Corner Center, Avocado at 29th Street, Brilliant Earth and Reformation at Broadway Plaza, Gorjana at Biltmore, Mango at Los Cerritos and three new stores with Intimissimi at Chandler, Queens and Santa Monica Place. As you can see by the names just mentioned and those mentioned on several earlier calls, the emerging brands category remains a very important category to us.
Finding new brands and new uses is a major initiative of the Macerich leasing team, the results of which will attract many different demographics of shoppers and will help to differentiate our centers from those of our competitors. Now, let's look at the new and renewal leases we signed in the third quarter. In the third quarter, we signed 206 leases for 766,000 square feet. Year-to-date, we signed leases for 3.1 million square feet, which is about 300,000 or 10% more square footage than we signed during the same period in 2022. And as we've stated several times, 2022 was a record year for us in terms of leasing volumes. So, to be ahead of 2022, this far into the year is a telling indicator of how strong this year is trending. Notable new leases signed in the second quarter include two Foot Locker superstores, one at Tysons Corner Center and one at Deptford Mall.
We signed [Garage] at Washington Square, Mizzen + Main at Kierland, 3 new Pandora stores at Fashion Outlets of Niagara Falls, Stonewood and Valley River. At Flatiron Crossing, we signed DSW in Five Below for a total of 25,000 square feet. These 2 stores will backfill the former Ultimate Electronics space joining Forever 21 and The Container Store and once again a former 120,000 square foot vacant anchor box is now 100% leased. In the digitally native and emerging brands category, we signed leases with FWRD and Warby Parker at Chandler Fashion Center, YETI at Washington Square, an inspiration company at Danbury Fair, Deptford and Freehold Raceway. And lastly, we're very excited to announce the signing of Life Time Fitness at 29th Street in Boulder, Colorado.
This will be our 5th deal with this premier fitness and wellness brand and we look forward to the traffic and energy we know they will bring to 29th Street when they open in early 2024. Looking at our 2023 lease expirations, we now have commitments on 84% of our 2023 expiring square footage that is expected to renew and not close with another 13% in the letter of intent stage. For comparative purposes, the 84% committed is 800 basis points better than where we were last quarter. In terms of 2024, expiring square footage were almost 30% committed with another 40% in the letter of intent stage. Again, I'm very pleased to be where we are with our 2023 and 2024 expiring square footage. Given the uncertainty that still looms in the macroeconomic environment, it's good to take this renewal risk off the table sooner rather than later.
Turning to our leasing pipeline, at the end of the third quarter, we had 151 leases signed for approximately 2 million square feet of new stores we expect to open during the remainder of 2023 and into 2024 and early 2025. In addition to these signed leases, we're currently negotiating leases for new stores totaling just over 700,000 square feet, which will also open during the remainder of 2023 and into 2024 and 2025. So, in total, that's 2.7 million square feet of new store openings throughout the remainder of this year and beyond. And as always, it's important to emphasize, these are new leases with retailers not yet open and not yet paying rent and these numbers do not include renewals. So, to conclude, our leasing and operating metrics were solid in the third quarter.
Leasing volumes were strong, square footage lease continues to outpace 2022 when measured on a year-to-date basis. Leasing spreads remain positive at 10.6%. So, given this and everything Tom and Scott have talked about, we remain optimistic as we look at the remainder of this year, next year and beyond. And now, I'll turn the call over to the operator to open up Q&A.
Operator: The first question comes from Greg McGinnis with Scotiabank.
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