Good day, and welcome to the Macerich Company Third Quarter 2021 Earnings Conference Call. Today's call is being recorded. And now at this time, I'd like to turn the conference over to Samantha Greening, Director of Investor Relations. Please go ahead, ma'am.

Thank you for joining us on our third quarter 2021 earnings call. During the course of the 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 directions, 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, COVID-19 on the U.S., regional and global economies and the financial condition and results of operations of the company and its tenants. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included in the earnings release and supplemental filed on Form 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. With that, I'd like to turn the call over to Tom.

Thank you, Samantha, and thanks to all of you for joining us today. After navigating almost 2 full years battling the impact of COVID, we're very pleased to report an outstanding quarter with almost no COVID related restrictions in place. As you read in our 8-K this morning, we had a very strong operating quarter, and we're pleased to report excellent results. We are seeing huge retailer demand. Our shoppers have come roaring back as the U.S. consumers are continuing to shop with a purpose, and we see a higher capture rate than pre-COVID. Sales are exceeding pre-COVID levels with double-digit gains in the past 2 quarters compared to 2019, and that momentum is carrying into the fourth quarter. Retailer demand is at a level we have not seen since 2015. We expect traffic to continue to increase. The current level is over 95% of the 2019 traffic levels. Some of the second quarter highlights include: on a sequential quarter basis, we had occupancy gains of 90 basis points, and that's on top of the 90 basis point gain we had in the second quarter. At quarter end, our occupancy was 90.3%. We have a ways to go there, but we're making great progress. We saw robust leasing volumes for the quarter and year-to-date, both were in excess of 2019 levels. Year-to-date, we've executed leases for over 3 million square feet of space, and that compares very favorable to full year 2019 level of 3.3 million square feet, and the full year 2015 level of 3.4 million square feet. Once we include the fourth quarter, our full year 2021 leasing volumes will exceed not only 2019 but the prior high of 2015. We saw same-center NOI growth of 21% in the quarter and expect the fourth quarter to continue with…

Thank you, Tom. Now on to the highlights of the financial results for the quarter. We posted extremely strong operating results in the third quarter with same-center NOI increasing 21.4% relative to the third quarter of 2020, including lease termination income. And if we were to exclude lease termination income, same-center NOI still increased 20.6%. Funds from operations for the third quarter of 2021 was $18 million or 22% higher than the third quarter of 2020. FFO per share for the quarter was $0.45. This was $0.02 or 5% higher than consensus estimates of $0.43 per share and represents a $0.07 decline from the third quarter of 2020 at $0.52 per share. EBITDA margin has increased 1.2% from 57.5% at the third quarter of 2020 to 58.7% at the end of the third quarter of 2021. As Doug will soon explain, our portfolio occupancy continued to increase in the quarter and is up nearly 2% and over the past 2 quarters, given the extremely robust and resilient leasing volumes generated by our high-quality leasing team and real estate portfolio. This was a very strong earnings quarter. Primary factors contributing to these NOI and FFO gains are as follows: on the NOI front, one, the quarter included a $15 million or $0.07 increase in percentage rents resulting from the dramatic increase in sales that we reported earlier today and that Doug will soon expand upon; two, bad debt expense represents a comparative $15 million or $0.07 improvement quarter-over-quarter; and three, common area income has contributed another $0.04 of NOI and FFO, including from our urban parking garages. Consistent with what we reported last quarter, our common area business has proven to be quite elastic and resilient and is exceeding our early 2021 expectations. Offsetting these NOI factors were shopping center expenses…

Thanks, Scott. Tom and Scott did a great job of highlighting some of the leasing activity metrics at a high level. And as Tom mentioned, I'll dive in a little bit deeper. So the leasing environment continues to improve, and the leasing productivity continues to outpace pre-COVID 2019 levels. In fact, we're on track for our strongest leasing year since 2015. Sales were strong in September, and this is on top of a very productive July and August. September sales were up 17% when compared to September 2019. And once again, all categories, including food and beverage, comped positively. Looking at the quarter, third quarter sales were up 14% over third quarter 2019, and this is on top of the second quarter being up 14% versus second quarter 2019. Occupancy at the end of the third quarter was 90.3%. That's up 90 basis points from 89.4% at the end of the second quarter. As Scott mentioned, over the past 6 months, portfolio occupancy has increased 180 basis points relative to the 88.5% occupancy rate on March 31, 2021. And given the healthy retail environment that exists today, coupled with our strong leasing pipeline, which we'll touch on in a moment, we anticipate that occupancy will continue to increase throughout the remainder of this year and into 2022 and beyond. The pace of bankruptcies continues to decrease. And year-to-date, bankruptcies within our portfolio remained at the lowest levels we've seen since 2015. In the third quarter, only 2 tenants filed for bankruptcy. Within our portfolio, these 2 tenants accounted for just 5 stores and only 13,000 square feet. Trailing 12-month leasing spreads were minus 2.5%, that's down from minus 0.2% last quarter. And this is primarily a result of signing a 20-store package with one retailer, totaling just over 100,000 square…

[Operator Instructions]. We'll take our first question from Jim Sullivan with BTIG.

The first question I have -- when you look at the occupancy rate gain that you've achieved through the end of the third quarter and the leasing progress you've made for deals to come, and we think back to the analogy with the prior recovery after the great financial crisis, at that time, it took about 6 to 7 years to regain the roughly 500 basis points of occupancy loss in the GFC. Here, the vacancy loss was greater. The pace of recovery seems to be greater as well. And -- I don't know, I'm not asking you to make a forecast here, but when you think about getting back to, say, a 94%, 95% occupancy range, can you give us some time frame? I know you've said you expect it to be quicker, but obviously, it's a key driver of the portfolio, the strength of the portfolio, the EBITDA. And I just wonder if you can help us, Tom and Doug, indicate how long it's going to take to get back to that number at this time?

Yes. Sure, Jim. By the way, I think after the great financial crisis, we recovered in 4 years, 4.5 years, something like that. And we look at the pace today, you're correct, it is more rapid than what we saw in 2010 and '11. And if we stay on pace with what we've seen in the last 2 quarters, I think by the end of 2023, we'll be back in the occupancy levels that we were at pre-COVID. Again, it depends on the pace, but everything we see ahead of us is a tremendous demand and some pretty big volume, and we think we can keep up that pace.

Okay. And then the second question for me. You mentioned Primark as a notable important big box going into several centers successfully and with more to come. And I wonder if you can just help us compare this with your -- the legacy department store transactions that were in the portfolio before those department stores started closing? And I know that Primark isn't necessarily taking as big a box, but help us understand kind of what kind of per foot revenues you can get from Primark versus those legacy deals obviously, without disclosing the specific numbers that you may not be comfortable doing?

Yes. I mean Primark is new. They're a bigger version of what we've seen come over from Europe in the past. Don't take the same size as a traditional department store. They do pay more rent. The traditional department stores were notorious for not paying much rent, frankly. They were a traffic driver. And so the economics are better, and we think they're going to continue to gain momentum and continue to expand. So exciting. I guess our latest anecdotal evidence on that is when we opened Fashion District to Philadelphia a few weeks ago, and even though the city of Philadelphia has not fully bounced back yet, there are people lined up to get in that store and a lot of traffic. So Doug, you can add further and elaborate, but that's my view. It's a much different type of department store than those we've been replacing.

The only thing I would add, Tom, is that while maybe not as big as the traditional anchor stores, they do act like a traditional anchor store in the way anchor stores are supposed to be. And as I mentioned in my remarks, Primark does draw outside of our traditional trade areas, and it does elongate the shopping trip. So it really is doing what all the traditional anchor stores used to do and were intended to do, and we're thrilled to bring them over here and look forward to doing many more deals with it.

We'll take our next question from Derek Johnston with Deutsche Bank.

Kind of expanding on the last question. So the near-term openings you've discussed or are close to announcing, both Primark and others, clearly, backfilling various anchor closures which are likely out of the same-store pool due to length of vacancy. So can you give us an idea of the economic benefit or perhaps the mark-to-market you're seeing with the new leases? And what annual escalators you may be getting? And then lastly, how do you see traffic trending once they're open versus, say, a Sears or a JCPenney or a Century 21, for example?

Derek, this is Scott. I would say that it really depends as to whether or not they're in the same center pool. It really depends on what's happening to the extent we're simply replacing uses within the box as opposed to tearing down the box and doing something broader from a mixed-use perspective. Those things are in the same center pool. So for instance, a Primark substituting in for JCPenney, we would consider that to be same center. We pay them a tenant allowance on occasion and have a little bit of retrofit work before we deliver space. That wouldn't be considered a major development and would be included with wood being within the same center. To the extent we're turning down a box at, say, Los Cerritos or Watchman Square, where, as you know, we're going through entitlements right now to add a mixed-use appendage to the campus. In those instances where there's a more heavy development spend, we're probably going to be adding GLA. That would be non-same-center. In terms of -- maybe you can repeat the second part of your question, just to touch on that as well.

Yes. Just the economic benefit or perhaps the mark-to-market you're seeing with the new leases, any escalators and how you view traffic clearly improving once they're open versus the legacy boxes.

Yes. I think just on the rent side and the mark-to-market, just to expand on Tom's comments without getting specific in terms of rent levels. The anchors, typically we're paying no to very minimal rent, low to mid-single-digit type of rent on average. So we're getting more full big box rents associated with these deals. And obviously, capital is precious, and we wouldn't be making these moves unless they made economic sense for us. So there is a very positive mark-to-market and a nice yield on our cost.

And then in terms of traffic, I mean, clearly, replacing JCPenney and Sears with the likes of Primark, Target and Shields, we're going to have significantly more traffic and significantly more sales. So the commerce that's generated from those boxes is going to be far greater with those new tenants compared to the ones that have vacated, including Penny and Sears. So we expect a many times multiple of sales and traffic from Primark, Target and Shields.

And that's an important point to note. And when you think of a Shields you think of all the space in two levels, it's leading up to it. It's not only the mark-to-market on the anchor box that we may be talking about on any given deal. It's really all of the reletting over the next 3 years as we sell into Shields coming to the center or excuse me, or Primark coming to the center or target. It makes the space around at the online shop space, imminently more valuable, and we're able to mark that space up.

Yes. That makes sense. And my second question, the FlatIron in Colorado, can you discuss what was entitled recently and how you're thinking about the mixed-use transformation, be it experiential, residential office co-working, whatever is being considered? And then how do you plan to approach it? And really other repositioning projects as well. Are you looking to do this solo or maybe with partners and perhaps a JV component where the structure may be a little less capital intensive but also meaningfully accretive? Anything you'd share there would be helpful.

Yes. Derek, I'll discuss it kind of from a global approach and Scott can get into some of the details on FlatIron. But our goal is to densify and diversify our portfolio wherever we have the opportunity A couple of good examples are at Los Cerritos in Washington Square, where we're replacing Sears boxes with mixed use, and going through the entitlement process now. And as we go through that, we have a variety of ways to do that. We can do the capital light version, which is effectively ground lease the land to a developer, residential developer or mixed-use developer. We could also contribute the land and take a partnership position based on the value of the land, or we could do a straight up 50-50 deal. So there's a lot of different ways to approach it. It's going to depend on the individual project and the type of return on cost that we can achieve.

And Derek, on FlatIron specifically, we received entitlements to add both multifamily as well as office. We do have a dark Nordstrom box. They closed during COVID and we do anticipate more than likely converting that box to creative office. The nearby Boulder market is -- has an insatiable demand for tech use. And we think we're very well positioned about 15 miles down the road to take advantage of that demand. And on the multifamily side, we would envision much the same, as Tom mentioned, contributing our land into a JV and then assessing what our further economic contributions will be from there by adding multifamily building as well as some restaurants and a sense of place picture and an entertainment environment where you could hold marketing events and the like with surrounded by restaurants and patios. So the very attractive new entry that complements the existing property.

We'll take our next question from Craig Schmidt with Bank of America.

Given the trend of sales per square foot metric, it would seem like your absolute sales per square foot number must be returning back to pre-COVID level. I was wondering when you might start reporting the sales per square foot number as opposed to just trend? And does Macerich intend to return to showing the sales per square foot by property ranking table that you published pre-COVID?

Craig, that is a good question. Answer is still to be determined, frankly. We were the only ones in the sector that did that. So it was a little bit of a proprietary disadvantage as it related to the leasing transactions and environment. But it's something we'll consider as we get on the other side of COVID here.

Okay. Great. And then -- I mean, we already entered the holiday season from a November, December standpoint. It seems like the supply chain disruption narrative is starting to dissipate. What are you hearing from the retailers in terms of their concerns about having enough stock in their stores for holiday '21?

Yes, I mean, we obviously -- Southern California based and seeing the freighters stacked up in the ocean trying to get into the port of Los Angeles. It's a topic that comes up frequently. Our retailers seem to have been hit harder earlier by the supply chain issues. They seem to have worked their way through most of that. And to tell you the truth, Craig, we don't hear a lot of complaints from the retailers about their supply chain seems the bigger issue is getting an adequate labor force in getting people rehired. That seems to be the biggest challenge for them these days as they approach the holiday season.

We'll take our next question from Samir Khanal with Evercore ISI.

Scott or Tom, can you help us understand how to think about growth for next year from an FFO perspective? I mean, this year, you had the valuation gain plus you also had a very high term fee number, which likely won't repeat. So maybe off of a clean FFO number, how should we think about sort of the building blocks for growth? I mean there's clearly the occupancy portion of it to pick up for next year. But is there anything else that we need to think about in terms of growth?

Samir. You touched on a few of the points. Obviously, we have a carryover of the share count that would anniversary through the first half of the year. we would also expect a straight-line rent, which was elevated this year because of abatements and concessions that we gave to tenants in the first half of 2021. We'd expect that to be substantially lower. Obviously, that's noncash. But on the positive side, we certainly would expect an increase in operating cash flow without giving any guidance. We do expect a strong [indiscernible] growth into next year. I don't think it's going to be 20% that we reported in the third quarter, but we do expect it to be strong, and we do expect cash flow growth.

And I guess on the occupancy portion, is there a number that you guys are sort of targeting or you can sort of throw out in terms of where you think occupancy could kind of year and sort of year-end for this year and maybe how you're thinking about next year?

Well, again, as I said earlier, it depends on the pace of the last 2 quarters. Both quarters had an up 90 basis points. So if you assume we achieve that in the fourth quarter -- fourth quarter leasing tends to slow a little bit because the retailers are trying to get open for the holidays, and they're moving into the last fiscal quarter of their year. But it wouldn't be out of the question to get to -- close to 91% by year-end. We're at 90.3% now. So that could even -- we could taper off a little bit from the last 2 quarters' pace and still get there. And then next year, we think the leasing pace is going to continue. So I think -- you can see us seeing some good pickup next year as well and getting into the 92% to 93% range by the end of 2022.

We'll take our next question from Floris Van Dijkum with Compass Point.

I had a question on the leasing [indiscernible]. clearly, you guys are big beneficiaries. Your term -- sorry, your percentage overage rent was very high, as you mentioned, $15 million. What -- as we think about next year as well, what percentage of your current portfolio is temp tenants and how do you think about your specialty leasing, particularly going into the holiday season and going into next year when presumably last year, you were -- there is very little of that in your numbers.

Yes, especially leasing, and that's a pretty broad category. It would include advertising. It would include anything that's not long-term traditional leasing, and it makes up, at any point in time, 10% to 15% of our NOI. And I related to NOI rather than top line revenue because most of that drops right to the bottom line. And we did a pretty good job of getting vacant space filled very quickly when we got the bankruptcies in 2020. And so as we continue to do more permanent leasing, the overall occupancy level goes up,the permanent percentage lease goes up, there's going to be less inventory for the specialty leasing folks. So I would expect that to actually taper off a little bit. It will be strong in the fourth quarter. We've done a good job releasing that space, but I think a lot of that space will move from big temporary space to permanent space in 2022. And so I would expect that the pace of growth with business development or specialty leasing to taper off.

And sort of where are you in temp occupancy today versus where you are normally? How much more upside is there in converting that into firm tenancies?

Yes, Floris. Scott. We're in the mid-6% range on occupancy right now on a temp basis. As Tom mentioned, I would think that, that will tick up closer to 7% by the end of the year. But given the demand we're seeing, I do expect that, that will start to subside as we move forward into 2022, we'll start to convert some of that temp occupancy to perm occupancy. It's an important driver for us, of course. The temp rents are typically 35%, 40% of what a full-time permanent tenant would be. As we fractionally say Doug's job and Doug's team's job is specialty leasing group out of business. I'm not saying we're going to eliminate specific leasing, but affectionately say, our ultimate goal is to have more permanent leasing. And look, given the volume that we're seeing, I think we're headed in that direction as we move into '22 and '23.

Great. And if I may have one follow-up question as well. I noticed your lease spreads, there's a difference between your JV assets and your consolidated assets. And I'm curious -- Obviously, the overall spread was marginally negative for the quarter. But what was driving that? Is there any -- are there any anomalies behind that? And is that partly have to do with you taking more percentage rent in some instances? Or -- maybe you can give us some more color on that. That would be helpful.

I mean that can fluctuate quarter-to-quarter depending on what leases are expiring and what new deals get done. So it can vary quite a bit. Historically, we've always had bigger re-leasing spreads in the JV assets, and that's because a lot of our bigger assets tend to be JV. If you think Tysons, for example, Scottsdale Fashion Square, some of those type assets that have very high sales per foot are JVs. And historically, that's been the case. And I think we'll continue to probably see that the case.

We'll take next from Rich Hill with Morgan Stanley.

I was hoping you could help us maybe bridge the 2.5% -- negative 2.5% leasing spreads disclosed in the prepared remarks to the average base rent per square foot in the supplemental. If I'm just looking at the delta on executed versus expired leases, it looks like it's more negative than the negative 2.5%. So maybe just a bridge to help us understand those two numbers.

Yes. Sure, Rich. Average base rent includes the entire population, all leases. The leasing spread is a metric that compares for leases that are over 12 months. It compares the new rent, new base rents relative to expiring rents over the last 12 months. And so it's not a same-center metric. So I don't think you can necessarily drive a real clean comparison between average base rent, again, which is over the entire population versus -- which -- of course, that entire population would have just grown relative to last year based on fixed increases. I think you can compare that to just a 12-month sample. Again, that 12 months sample, excluding renewals that were less than 12 months. [indiscernible] a lot of that comparison.

No, that's helpful. The reason I was asking is one of your peers noted that their leasing spreads were not same-store. So I just wanted to make sure I understood that. The second question I had was about overage rent. I'm not super sure how these are structured. So I was hoping you could give us some more insights. And specifically, let's say, sales stay at these robust levels, but don't accelerate, does your percentage rent stay the same next year? Or does the threshold step up and maybe lead to lower percentage rents? I'm just not sure how they're structured, so I'd love some insights on that.

Sure. Assuming constant sales going forward, you'll naturally see a tick down of percentage rent as we convert that into fixed rent as leases roll. Again, we can only access a certain portion of leases in any given year. But assuming constant sales, you would see that tick down. In terms of what's driving it, just -- look, the elevated sales are causing just a larger swath of tenants to ultimately break. Yes, there's a little bit of this associated with some of the COVID modifications that we did. But really, as we look at it, it's really just there's a lot more to tenants breaking. I mean you have some tenants that are really, really outperforming at a level that we wouldn't have anticipated and are now paying percentage rent.

That being said, there's a very small percentage of our overall tenant base that pays percentage rent, Rich. I think it's less than 10% of our tenants paid percentage rent. So it's a relatively small base. But when you're up as much as we've been up the last couple of quarters, you push a fair number of tenants into percentage rent that weren't there in 2019 and certainly not there in 2020.

And your next from Linda Tsai with Jefferies.

You discussed earlier that electric car companies like Polestar are opening at your properties. Does this have the potential to significantly increase the sales productivity of your malls like Tesla did? And then how many electric car company leases you have across your portfolio currently?

So that's a really good question Linda, and we don't know yet. And I'm not sure they know yet either in terms of the sales. They're pretty exciting. They're an interesting product. We probably have 5 different brands that we've done deals with. I think we've got about 20 leases in place, and that includes a handful of Teslas. But there's quite a bit of demand. And we've seen them come in -- for example, at Corte Madera, we had a Polestar that came in on a temporary basis. And they had such a good response from the consumer that they went fairly quickly into a permanent space. And I think we're going to see more and more examples of that. And it's great. It brings traffic. It brings interest to things diversity to the tenant mix, and we're kind of excited about it, frankly. In terms of what kind of sales they do remains to be seen. But I think it's a direction the whole country is going, frankly, is to more electric vehicles. And some of these are fairly well sponsored. In one case, Volvo is part owner of one of the companies, and they've got a fair amount of capital behind them at this point.

Can you remind us how many EV charging stations you have across your portfolio?

We have charging stations now at a vast majority -- I'll say, 95% of our parking fields at our properties are -- do have charging stations.

Got it. And then regarding the 20-store package that impacted re-leasing spreads, it sounds like it's a pretty significant deal. Is there any -- are there any more details you could provide, like, is this a new type of retailer? Or is it a legacy? Just -- or any details on where they might be opening?

It's an existing retailer that we've had for probably the better part of 10 to 15 years, and they're using this as an opportunity to expand their fleet, recognizing that there's a lot of high-quality space out there. We were able to accomplish a deal that probably added 40, 50 basis points of occupancy. But beyond that, we really obviously can't get into names and specific.

And the last quarter, you highlighted rent abatement. Were there any rent abatements this quarter?

Very negligible, Linda. I'm pleased to say that the COVID negotiations are behind us. That's a very positive thing. So they were very, very small.

We'll take the next question from Mike Mueller, JPMorgan.

For the 180 basis points occupancy increase you've seen, how varied was that across geography and asset productivity?

It was It was across the board. I mean, when you're talking about -- let's say, we have 45 assets, if you're talking about the bottom 15%, obviously, there was less new deal activity there than there was in the top 30%. But relative to our better assets, it was really across the board in terms of geography and productivity. And not only across the board, it's been across the board in terms of size, in terms of diversity of category. Doug, do you want to expand?

No, Scott, I think you're right on, and that's really why this business is so exciting right now. And I think it's one of the reasons -- Tom's point earlier, why we may drive occupancy quicker than we did in coming out of the great financial crisis because of the breadth of uses that we have, I mean, we're not talking about traditional retail anymore, although we are still leasing the traditional retail, but when you start layering in entertainment and home furnishings and food and beverage and grocery for that matter, you're going to see occupancy rebound a lot quicker, but probably as importantly, you're going to see our shopping centers transition from traditional malls into town centers. And that's really our goal to be everything for everybody.

We'll hear next from Greg McGinniss with Scotiabank.

Just a couple of quick ones for me. First, how does average ABR signed or the portfolio average base rent account for the percent rent leases?

It does not average base rent just factors in average or base rent doesn't factor in percentage rent. So if we were to, for instance, include percentage rent, obviously, it would be up relative to this time last year just because of the increases we've reported on. And similarly, the leasing spreads would likely show a little bit of improvement as well. We have not quantified that, but -- It does not include any percentage rent.

Okay. But it is including the base rent portion of those lease signs?

Correct.

Okay. All right. That's helpful. And then Doug, I appreciate the color on the 2021 lease expirations. Just curious look what the retention rate has been on expiring leases, how that compares to historical averages? And then for the 2.7 million square foot lease pipeline that you guys have, how much of that GLA relates to space that is currently occupied versus vacant?

So I think, Greg, your question was what percentage of the deals that we're quoting are renewals versus new deals?

Well, it's more just understanding for the expirations that you did have -- sorry, for the 2021 expirations, how much of that was sit on, right, or left the portfolio? And then for the lease pipeline, how much of that is going into currently occupied space?

It's Doug. I don't think we have the exact breakdown, but it is definitely a combination of renewing expiring leases and then backfilling expiring leases with new leases.

It's historically been about 65% renewals, 35% new. Might be a little bit higher coming out of COVID as a result of the rash of bankruptcies. But typically, that's what it's been roughly 1/3, 2/3.

And I would say that number is probably a little bit higher when you look at the pipeline just because if you think about the pipeline, we're talking about leases that are opening in the end of '21 or beginning or mid-2022. And in order to do that, you need to have vacant spaces. So I would say that skews higher towards vacancies than it does expiring leases. And to the second part of your question, Greg, you asked about, I think it was leased versus physical. We're about 2% to 3% of the leased or economic occupancy is not yet in place. And so there's always a trailing impact of about a 9-month -- 6- to 9-month build-out space for our typical inline space. And so some of that occupancy will not start to pay rent, we'll not start to see the cash flow benefit until next year. So there's always that lagging effect. It's about 2% to 3% though.

We'll hear next from Katy McConnell with Citi.

Can you help us understand the bridge from 3Q FFO to the implied 4Q level, which usually sees a larger pickup from the holidays? So are there any other factors to be aware of within 3Q that may not be reoccurring?

Yes, sure. Katie. Yes. At the midpoint of our guidance, we'd be slightly ahead in the fourth quarter relative to the third quarter. As you can see, we've provided a pretty broad range and the broadness of that range really relates directly to what could happen in the fourth quarter relative to sales, sales continue at the current trends, we could end up higher than the midpoint towards the upper end of our range. We think we've made some realistic sales estimates that are embedded within the midpoint. But look, it's very possible we could end up higher than our midpoint if sales continue at the current pace. Keep in mind that in the third quarter, lease termination income was elevated relative to where we think it's going to end up in the fourth quarter. So that's another factor. And then the seasonal nature of our business, the third quarter is not like the fourth quarter, which is more expensive to operate our shopping centers. We've got expanded holiday hours, expanded staffing. So that means more housekeeping and maintenance staff, security staff, in some cases, utilities and things like snow removal, just becomes a more expensive business to run in the fourth quarter given the seasonal nature of it. So those are some of the other factors that you should keep in mind.

And to the point on expenses, can you talk about your outlook for reimbursement since the recovery rate is still trending below average relative to the OpEx improvements to date or increases. Is that a function of how leases are being structured today? Or would you expect to see more of an improvement next year?

Yes. Part of that, Katy, is just going to trend with the occupancy level. We switched to fix cam a number of years ago. And so when occupancy drops, reimbursements are going to drop almost pro rata. And we expect that to come back as we fill up more space and we get closer to our more normal level of 93%, 94% occupancy.

And that does conclude today's question-and-answer session. I'd like to turn the conference back over to Tom for any additional closing remarks.

Thank you, Cody. Well, thank all of you for joining us today. We look forward to reporting the balance of the year and seeing many of you at NAREIT next week.

Thank you. And that does conclude today's conference. We do thank you all for your participation, and you may now disconnect.