The Macerich Company (NYSE:MAC) Q4 2023 Earnings Call Transcript

The Macerich Company (NYSE:MAC) Q4 2023 Earnings Call Transcript February 7, 2024

The Macerich Company misses on earnings expectations. Reported EPS is $0.2768 EPS, expectations were $0.55. The Macerich Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Q4 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 fourth quarter 2023 earnings call. During the course of this call, we’ll be making certain statements that may be made 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.

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’d turn the call over to Tom.

Tom O’Hern: Thank you, Samantha. By now, it’s old news, but on Monday, we announced my pending retirement after 31 years at Macerich. Today is my 118th Macerich earnings call and my last. I will miss all of you, I would like to say I’ll miss all of you, but I’m not so sure about that. When I joined Macerich 31 years ago, it was to help Mace Siegel and Ed Coppola to take the Company public. We did that in March of ‘94. Our total market cap was a modest $650 million. Today, our market cap is $11 billion. We went from having a portfolio of malls in the mid-markets, doing about $350 a foot in sales, to a portfolio in major coastal markets doing $836 per foot in tenant sales. There’s been a dramatic improvement in the quality of the portfolio to say the lease.

We joined Macerich in 1993. No way and hell did I think could be here 31 years later. Nothing in my Iron Man background prepared me for a run of veteran. I will be forever thankful to my Macerich colleagues and friends for our collective accomplishments. Today, Macerich is extremely well positioned for the future as I pass the baton of leadership over to a man most of you know, Jackson Hsieh. He’s the right person to take the Company forward and to continue to execute on our strategy of densifying and diversifying our portfolio of top quality town centers. Regarding the upcoming leadership change, there is a detailed press release and 8-K on the topic, so I will refer you there. So the remainder of this call, we will be focused on the quarterly results and the guidance and outlook for 2024.

So now to focus on the quarter, I’m very happy to be leaving on extremely positive news. We had a strong fourth quarter, which included same-center NOI of 3% for the quarter and 4.5% for the year. Occupancy is now up to 93.5%. That’s a 90 basis point improvement over the end of 2022. We had a total shareholder return of 46% for 2023. That’s a top 10 finish among all REITs. We posted positive releasing spreads of 17.2% for the year. We had quarterly EBITDA margin improvement of over 100 basis points versus the fourth quarter of last year. Our partnerships sold a One Westside office building to UCLA for a pro rata share of $175 million to Macerich. We did over $890 million of financings that was closed or committed in the fourth quarter.

More on that from Scott in a minute. We signed over 4 million square feet of leases during 2023. That’s an all-time Macerich record, and that’s on the heels of the prior record, which was set in 2022. Portfolio average sales per foot was $836, down slightly from last year, but nonetheless a top quality sale activity. Bankruptcies continued to be at a record low. We continue to expect gains in occupancy and net operating income as we progress through 2024 and into ‘25. Also, keep in mind, as a result of the very strong leasing activity in ‘22 and ‘23, we have a very large and healthy leasing pipeline with nearly 2.2 million square feet of leases that have been signed but are not open yet. Once those 10 tenants open, it is going to fuel our NOI growth in ‘24 and ‘25.

And now, I’d like to turn it over to Scott to discuss in more detail the financial results, earnings guidance and the significant financing activity we had in the past few months.

Scott Kingsmore: Thank you, Tom. This morning, we’re extremely pleased to report a strong finish to the year. As Tom noted, same-center NOI increased 3% during the fourth quarter of 2023 relative to the fourth quarter of ‘22. When excluding lease termination income for the year 2024 same-center NOI growth, excluding lease termination income was a positive 4.5%. FFO per share for the fourth quarter was $0.56 and was $1.80 per share for 2023 for the year. The quarterly result was $0.03 or 5.7% more than FFO during the fourth quarter of 2022 at $0.53 a share and was in line with consensus estimates for the quarter. FFO for the year was in line with our most recently issued guidance, which was a midpoint of $1.80 per share. Primary major factors contributing to the quarterly FFO per share increase are as follows.

One, an $11 million increase in rental renews, which included a $13 million increase in top line minimum rent, $2 million increase in recovery revenue, which were offset by a $4 million decline in percentage rent. These trends are consistent with what’s been reported over prior quarters, they’re driven by improved occupancy growth and rental rate as well as a continued conversion from variable to fixed rent structures with CAM and tax recovery charges. Secondly, we had a $9 million increase in termination income. This was primarily driven by a single lease termination deal, which was a very strategic transaction that we expect will facilitate a major future redevelopment opportunity. These positive factors were offset by the following: one, an $11 million unfavorable increase in interest expense due to rising rates.

This figure excludes accrued default interest, which is consistent with our reporting over the prior quarter. And then secondly, a $4 million decline in noncash straight-line rental revenue, primarily from the conversion of GAAP to cash rents for the lease with Google at One Westside, which Tom mentioned we’ve disposed of as of year-end. To recap, as we have emerged from the 2020 pandemic same-center NOI growth, generated by our high-quality Class A portfolio has been tremendous, with NOI growth averaging 7.4% in both ‘21 and ‘22, followed by 4.5% same-center NOI growth in 2023. We are extremely pleased with our resilient core NOI growth during the past three years. This morning, we issued our initial guidance for 2024 funds from operations.

2024 FFO is estimated in the range of $1.76 to $1.86 per share or $1.81 per share at the midpoint. Here are several details underlying this earnings fguidance. The FFO range includes an estimated same-center NOI growth in the range of 2.25% to 3.25%. In terms of quarterly cadence for our 2024 estimated FFO guidance, we expect approximately 21% in the first quarter, approximately 24% in both the second and third quarters and the remaining approximately 31% within the fourth quarter of 2024. Primary major factors that result in a reconciliation between 2023 actual funds from operations and 2024 estimated FFO are as follows: Same-center NOI is estimated to contribute roughly $0.10 of FFO this year. We had roughly $0.03 of FFO estimated from a relative improvement in valuation adjustments pertaining to our investment in direct investment in retailers.

And we had roughly a $0.015 year-over-year increase from the acquisition of our partner’s interest in Freehold Raceway Mall transaction, which closed in the latter part of 2023. These positive factors will be substantively offset by the following: one, a $0.07 increase in interest expense when viewed on a same-center basis, two, an anticipated $0.04 decline in land sale gains. We’ve spoken about this in the past. This decline is due to the robust disposition activity from our land sale program that we’ve undertaken since 2021 which is significantly depleted our undeveloped land inventory that remains. And then lastly, about a $0.015 per share dilutive impact from increased share count which is primarily driven from the Company’s various share-based compensation plans.

To emphasize, consistent with 2023, our 2024 outlook continues to reflect healthy operating cash flow generation of approximately $300 million after recurring capital expenditures and leasing costs, but before payment of dividends. More details regarding our guidance assumptions can be found on Page 15 of the Company’s Form 8-K supplemental that was filed early this morning. On to the balance sheet. Over the past few months, we have made considerable progress addressing our debt maturities. In December, we closed a $710 million five-year CMBS refinance of the $666 million loan on Tysons Corner Center. The new loan bears interest at a fixed rate of 6.6% and is interest only for the entire loan term. Also in December, our joint venture sold One Westside, as Tom alluded to, to UCLA for $700 million.

The existing $325 million loan on the property was repaid and approximately $78 million of net proceeds were generated at our 25% ownership share. In January, we closed a $24 million five-year bank loan refinance of the existing $23 million loan on Chandler Boulevard Shops. The new loan bears variable interest at SOFR plus 2.5%. And is interest only for the entire duration of the long term. In January also, we repaid the majority of the loan on Fashion District in Philadelphia, roughly $8 million remains, and that matures in April and is anticipated to be repaid at that time. In January, we closed $155 million 10-year CMBS refinance of the existing $117 million loan on Danbury Fair. The new loan bears interest at a fixed rate of 6.39% and is interest only during the of the 10-year loan term.

We are currently working with the loan servicer on a multiyear extension of the $86 million loan on Fashion Outlets of Niagara and we do expect this transaction to close later this month. Once closed on that Niagara extension, we will have a very manageable $400 million of maturities remaining in 2024 and across three separate loans. To recap the year, we’ve been extremely active in the debt capital markets during 2023 and year-to-date so far in 2024 across eight transactions, including Niagara, we will have refinanced or extended eight loans totaling $2.9 billion or $2.1 billion at our ownership share. This activity included a 4.5-year renewal and upsizing of our $650 million revolving corporate credit facility during the third quarter of last year and let’s remind ourselves that closing was amidst the regional banking crisis within the United States.

So we’re very pleased with our activity throughout last year and to start this year. A year ago, we anticipated improvement in the debt capital markets during the latter portion of 2023 given that the Federal Reserve was expected to be then near the end of its historic rate hiking cycle. And in fact, that expectation has proven true. We’re now finding significant opportunities to finance our assets within the sustained strong performance of our Class A retail. We also believe that we are benefiting from a rotation of financing capital away from the office sector and into the Class A retail real estate sector. Our recent transactional activity supports that thesis. In mid-November, we acquired our partner’s half share in Freehold Raceway Mall for $5.6 million and the assumption of our partner share of debt.

We now own 100% of Freehold Raceway Mall. We currently have approximately $657 million of available liquidity, which includes $490 million of capacity on our corporate credit facility. And with that, I’ll turn it over to Doug to discuss the leasing and operating environment.

Doug Healey: Thanks, Scott. We closed out 2023 with very strong leasing metrics and leasing volumes. In fact, 2023 was a historic and record leasing year for Macerich, dating back 30 years as a public company. Year-end 2023 sales were down 1.8% from year-end 2022 and after a post-pandemic spike in spending across all retail categories, 2023 was clouded with increasing interest rates, inflation and the constant threat of a recession. In addition, we’ve definitely seen a change in spending habits with consumers now focusing on travel, dining out, entertainment and other various services. This doesn’t come as a surprise, and we expect 2024 to once again normalize and ultimately reflect more traditional consumer spending habits.

Sales per square foot as of December 31, 2023 were $836. That’s down slightly from $847 at the end of the third quarter, and that’s primarily due to a decline in the sales of electric vehicles. Trailing fall leasing spreads were a very healthy 17%. As of December 31, 2023, that’s up 660 basis points from the third quarter and up over 13% when compared to December 31, 2022. In the fourth quarter, we opened 391,000 square feet of new stores. For the full year 2023, we opened almost 1.6 million square feet of new stores, which is 80% more square footage than we opened during the same period in 2022. Notable openings in the fourth quarter include an expanded and newly reimagined American Eagle flagship at Tysons Corner Center; Five Below at Valley Mall, Levi’s at Los Cerritos, Pandora at Stonewood and North Face at Broadway Plaza and FlatIron Crossing.

In the digitally native and emerging brands category, we opened Beyond Yoga at Broadway Plaza, Purple at Los Cerritos, Warby Parker at Chandler and YETI at Washington Square. In the international category, we opened Aritzia and Intimissimi, Corte Madera, Lululemon at Freehold Raceway Mall; UNIQLO at Green Acres, Zimmerman at Scottsdale Fashion Square and Zara at Queens Center. Lastly, in the experiential category, we opened Camp at Tysons Corner and Round1 Spo-cha at Arrowhead Town Center. Now let’s take a look at the new and renewal leases we signed in the fourth quarter. In the fourth quarter, we signed 186 leases for 1.1 million square feet. For the full year 2023, we signed leases for 4.2 million square feet, and that’s up from 3.8 million square feet or 12% when compared to the same period in 2022.

And as I mentioned earlier, 2023 was a record leasing year for Macerich over the past three decades. Notable new lease signings in the fourth quarter include Buck Mason, Kate Spade, Mango, Maggiano’s and Level 99 at Tysons Corner, Round1 at Chandler, Dave and Busters at Freehold, launch in ShopRite at Green Acres, a second office lease with San Bernardino County at Inland Center, Arterex at Washington Square, True Food Kitchen at 29th Street and BOSS at Scottsdale Fashion Square. As always, our focus in the fourth quarter was in large part addressing our lease expirations, finalizing 2023 and getting a head start in 2024. In doing so, in the third quarter, we signed over 130 renewal leases with 84 brands totaling 475,000 square feet. With that, we’re basically done with 2023 and now have commitments on 44% of our 2024 expiring square footage with another 34% in the letter of intent stage.

2023 was another year of newness for us. Once again,, bringing new unique and emerging brands was a major initiative for our leasing team and a way for us to really reimagine and differentiate our town center from our competition. To that end in 2023, we signed leases with over 80 new Macerich brands, totaling just over 600,000 square feet. Examples include Beyond Yoga, YETI, Club Studio, Shoprite, Level 99 and Maggiano’s, Elephante and Ketch, just to name a few. Turning to our leasing pipeline. At the end of the fourth quarter, we had 126 signed leases for 2.2 million square feet of new stores, which we expect to open in 2024, 2025 and 2026. In addition to these signed leases, we’re currently negotiating other 80 leases for new stores totaling almost 600,000 square feet, which will also open in ‘24, 2025 and 2026.

So in total, that’s over 2.8 million square feet of new store openings throughout the remainder of this year and into 2026. And 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 I can tell you that this leasing pipeline of new store opening accounts for $64 million of incremental rent, which represents roughly 8% of our current net operating income and this incremental rent will continue to grow as we approve new deals and sign new leases. So to conclude, our leasing and operating metrics were very solid in 2023. There was only one bankruptcy in our portfolio in the fourth quarter and only 10% for all of 2023. The bankruptcies overall in both 2022 and 2023 were at their lowest levels since 2013, which is consistent with our significantly reduced tenant watch list.

Leasing volumes were at record levels. The result of which is a very strong, vibrant and exciting pipeline of tenants slated to open this year and into 2026. And as I’ve said in the past, and it remains the case, while there’s still uncertainty in the macroeconomic environment, to date, we continue to see a little pullback from the retailers. And I think this is a result of the very healthy retailer environment that exists today as well as a testament to our best-in-class portfolio of super regional town centers. So given this and everything Tom and Scott discussed, we remain optimistic as we look to 2024 and beyond. And now, I’ll turn the call over to the operator to open it up for Q&A.

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Q&A Session

Operator: [Operator Instructions] The first question comes from Jeffrey Spector with Bank of America Securities.

Jeffrey Spector: And first, congratulations to Tom and Ed, I wish you the best in retirement. I guess probably appropriate first question would be for Jackson on the fact that Tom said. You’re the right person to take things forward, you talked about densification efforts, tremendous leasing is Jackson, what are you — I know you just started, but could you provide some of your initial thoughts? Like should we expect any strategy changes at this — do you have in mind?

Tom O’Hern: Jeff, it’s Tom. Jackson is actually not with us here. He’s enjoyed so much deserved time off. He starts March 1, so I’ll just ask you to hang on to that question until then, Jeff.

Jeffrey Spector: Okay. Sorry about that, if I miss that. If I could then ask Doug, and congratulations, Doug, on a great ‘23 in terms of leasing. I appreciate all the stats you provided, including where you stand today on ‘24. I think you said 80% commitments, square footage, 44% in LOI stage, I guess would you be able to compare that to where you stood a year ago as you entered ‘23, which turned out to be a record year? Like how do you feel today versus one: year ago?

Doug Healey: Well, there’s two parts to that question, Jeff. I think the first part, you were referring to our lease expirations. We’re basically done with all of our expiring square footage in 2023, and we have commitments on 44% of our 2024 expiring square footage and another 34% in the letter of intent stage. So we’re about 77% there with 2024 expiring square footage. I think the other part of the question really referenced more of our leasing pipeline in which we said we had 126 leases signed for 2.2 million square feet. That’s just about, Jeff, where we were at this time last year, give or take, just a little bit.

Jeffrey Spector: And then if I can then ask a second question. What are you assuming in terms of bad debt lease termination income in ‘24? And how does that compare, let’s say, to ‘23 or maybe versus historical?

Scott Kingsmore: Jeff, I’ll take that. This is Scott. Bad debts, we’re assuming those to start to normalize a little bit more relative to 2023. I would say that’s about a $0.02 headwind in 2024 against our same center. I don’t expect those to be significant in the fullness of time, but I do expect them to be a little bit larger than they were in ‘23, which frankly was a net reversal, and that was just a continuation of recovering some of those latent fully reserved receivables in ‘23. I expect most of that to be out of the pipeline now, and it will be trending a little bit more normal. Lastly, termination income, we did provide line item guidance for that, which is $10 million, and that was down about $3 million or so, give or take, versus where we finished in 2023.

Operator: The next question comes from Greg McGinniss with Scotiabank.

Viktor Fediv: This is Viktor Fediv here on with Greg McGinniss. I wanted to follow up on this lease termination income in Q4. I know probably that you cannot provide some specific details. But overall, what type of tenant was that? And you mentioned that it opened some strategic opportunity for you to redevelop that center. So when you kind of provide some more details on that?

Scott Kingsmore: Yes. The — yes, you’re right, I can’t speak to the specific tenant or the asset, frankly, other than to say, like I mentioned at the onset, that the lion’s share of that termination fee, pretty much all but roughly $1 million, $1.5 million of that was from that single transaction. That transaction was an anchor location in terms of the type of space, but we do expect that to open up a really significant redevelopment opportunity. We are working on predevelopment and preplanning of that right now as well as entitlement. Once we narrow down the scope and the exact cost and returns, which we expect to be, the returns to be in the low double-digit realm, we will disclose that in our pipeline. But it is a good opportunity. We’re very glad to get that transaction completed.

Viktor Fediv: And then the second question, probably on leasing demand part. So given that department stores sales were weaker versus broad retail sales in 2023, do you expect more optimization to occur within that space? And have you had any conversations with your tenants about that already?

Scott Kingsmore: So I’m not quite sure I caught all of that question. I would say this, though, and this is probably a good thing. As we look into 2024, I would not expect us to put up the same type of volume that we did in 2023 because in all candor, we’re running out of large-format inventory running out of boxes, big anchor locations. Over the last few years since 2021, we’ve leased about 2 million square feet and over 20 anchor locations. So it’s been very productive.

Tom O’Hern: Yes, I think you’re going to continue to see the shift away from department stores and into other big box uses. You saw us open Shields Sporting Goods for example, in a former department store space. You’ll see us open Art Museum in the former art-like theater space. We’re going to continue to see different types of uses, diversified uses, taking the department store space and converting that into other uses that frankly drive more sales and traffic. That’s a trend we’ve seen accelerating over the last five years, and that is going to continue as we go forward.

Operator: Our next question comes from Samir Khanal with Evercore.

Samir Khanal: Tom, congratulations on your retirement. We will miss you. So Scott, just on same-store NOI guidance here. Certainly, leasing is very strong. The pipeline looks great in the ‘24. But I just want to kind of dive into the same-store NOI growth that is moderating in ‘24. Maybe help us think through the drivers of that lower growth in ‘24 at this time.

Scott Kingsmore: Sure, Samir. I’ll walk through it. Obviously, great growth over the last three years, as I highlighted in my opening remarks. So for starters, we are dealing with some more challenging comps. In addition, I would say operating expenses do remain relatively elevated when you think of things like insurance costs, security labor, I mentioned bad debts, those are all contributing to some headwind in same center that I would quantify it roughly 150 basis points or so, headwind in same center. We are — given the robust leasing environment and remerchandising our space, we are taking space offline, so there is an element of downtime within that same center guidance. And I would estimate that kind of bracket a roughly 1% headwind in the same center.

That’s all positive, though, because we’re taking underperforming merchants offline. We’re putting in much more attractive merchants, much more diversified uses that will draw traffic and better sales volumes at better rent levels. So that is what you typically see in a robust leasing environment. So those are really some of the major moving pieces. And then, of course, as we do with each and every year, we do embed some reserves for the unanticipated in our guide.

Samir Khanal: And just from a modeling perspective, help us think through G&A for the year and also percentage rents?

Scott Kingsmore: Sure. G&A, I think if I were to point you to a run rate, we look at 2023, and I would expect maybe a marginal decline versus 2023 and 2024 across management company expenses, net revenues, rate expenses.

Tom O’Hern: One other thing to keep in mind on the G&A line, Samir, if you take a look at our proxy — last proxy, Page 50, you’ll see the combined compensation for Ed Coppola, Tom O’Hern and from the 8-K, you’ll be able to ascertain the compensation for Jackson. So that will be a fairly significant reduction in G&A just as a result of the CEO and President change.

Scott Kingsmore: And then, Samir, you also asked about percentage rents. If my memory is right, about 12 months ago, I said we do expect roughly a 15% to 20% decline in percentage rents into 2023 from 2022. And in fact, that played out. If you look at our percentage rents on a pro rata basis, they were down about 16% in ‘23 versus ‘22. And again, largely, that was a function of conversion of variable rent to fixed rent type structures. I think we worked through the vast majority of those at this point, Doug. I don’t expect a lot more of that. As we look into 2024, and we’re looking at percentage rent trends versus ‘23, I expect those to continue to tick down, but not nearly as significantly as they did in 2023. We’re estimating roughly about a mid-single-digit decline in percentage rents and some of that is just as you get escalations and base rents, you get an increase in breakpoint.

So there’s a natural transition of variable rent to fixed rent on that basis. But I don’t expect the type of leasing activity converting variable to fixed rent that we had in 2023 at all.

Operator: The next question comes from Floris Van Dijkum with Compass Point.