Good day, and welcome to The Macerich Company Second Quarter 2022 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Samantha Greening, Director of Investor Relations. Please go ahead.

Thank you for joining us on our second quarter 2022 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, including the adverse impact of the novel coronavirus on the US, regional and global economies and the financial condition and results of the 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 Web site 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 turn the call over to Tom.

Thank you, Samantha, and thanks to all of you for joining us today. We are very pleased to report another strong quarter with the majority of our operating metrics trending very positively. After a strong first quarter, we also had a very strong second quarter. We saw a high level of retailer demand, the resiliency of the American consumer was again on display and that is reflected in the 2.2% tenant sales increase in the second quarter compared to a very tough comp quarter of the second quarter of '21. Our portfolio average annual sales per foot for tenants under 10,000 square feet was 860, that's our highest level ever. We continue to see traffic at about 95% of pre-COVID traffic, but tenant sales are exceeding 2021 levels and also pre-pandemic levels. First half of '22 sales were up 7.6% versus the first half of '21 and sales per feet were up 11% compared to the pre-COVID quarter ended in the second quarter of 2019. The quarter's leasing activity continue to reflect retailer demand that is at a level that we have not seen since 2015. Some of the other second quarter highlights include an occupancy level at 91.8%, which was a 240 basis point improvement from the second quarter of '21 and a 50 basis point improvement from -- on a sequential basis compared to the first quarter of '22. We saw strong leasing volumes for the quarter, significantly in excess of pre-COVID levels. For the quarter, we executed 274 leases, that's a 27% increase over the second quarter of last year and a 42% increase over the pre-COVID quarter of 2Q '19. We saw same center NOI growth of 5.4% in the second quarter compared to the second quarter of '21, which was yet another strong quarterly gain.…

Thank you, Tom. Onto the highlights for the quarter. This morning, we posted strong operating results. Same center NOI increased 5.4% versus the second quarter of 2021, excluding lease termination income and increased 7.8% when including lease termination income. Year-to-date, through the first six months of the year, same center NOI has now increased 14% excluding lease termination income and 18% including lease termination income. FFO per share for the quarter was $0.46. This was an expected $0.13 lower than the second quarter of 2021, which was $0.59 per share, and it represents a $0.01 per share increase over FFO consensus estimates, which were $0.45 per share for the second quarter. Primary factors contributing to our quarterly results for FFO are as follows. One, a $21 million net of tax relative quarter-over-quarter decrease in valuation adjustments pertaining to our investments in retailers, which were unusually high in the second quarter of 2021. Secondly, a $13 million decrease in gains from land sales. Bear in mind that, these transactions can obviously be lumpy by nature quarter-over-quarter. And again, these were unusually large in the second quarter of 2021, creating a difficult comp. Third, an $8 million decrease in non-cash straight line of rent income, resulting from the high level of pandemic driven rental assistance that we granted to our tenants last year in the second quarter of 2021. Offsetting these negative factors were the following. One, an $8 million reduction in interest expense, which resulted primarily from the company's dramatic $1.7 billion or 20% debt reduction during last year. Two, $5 million of net benefit, resulting from a $14 million quarterly reduction in rent abatements, which was offset by a $9 million relative negative change in bad debt expense between the second quarter of last year and the second quarter of…

Thanks Scott. Leasing momentum continued in the second quarter, fueled by a very healthy retailer environment, sustained sales growth and increased occupancy. Second quarter sales were up 2.2% over second quarter of 2021. Year-to-date sales were up 7.6% when compared to the same period last year. Sales per square foot as of June 30, 2022 were $860, and this represents an all time high for our company. Occupancy at the end of the second quarter was 91.8% and that's an increase of 240 basis points relative to 89.4% at the end of the second quarter 2021. And we remain confident given the healthy retailer environment that exists today coupled with our strong leasing pipeline that occupancy will continue to increase throughout 2022 and into 2023. Trailing 12 month leasing spreads remain positive at 0.6% as of June 30, 2022, and that's compared to a negative 0.2% as of June 30, 2021. I'm happy with the progress we are making on our 2022 lease expirations. To date, we have commitments on 71% of our 2022 expiring square footage with another 22% in the letter of intent stage. And while we put the finishing touches on 2022, we're well on our way with addressing our 2023 lease expirations. In the second quarter, we opened 221,000 square feet of new stores. This brings our year-to-date store openings to over 400,000 square feet, which is about 20% more square footage than we opened during the same period last year. Notable openings in the second quarter include Free People in William Sonoma at The Village at Corte Madera, Love Sac at Freehold Raceway Mall and Country Club Plaza, three Windsor Fashion Stores at Green Acres, Kings and North Park, and nine stores with Cotton On, totaling almost 45,000 square feet. In the digitally native and…

[Operator Instructions] And we'll go first to Greg McGinniss with Scotiabank.

Just want to ask about the guidance range, still seems kind of fairly wide at this point in the year. So I'm just curious kind of what brings you to top end or the bottom end of that guidance range?

I'd say a couple large variables that contribute to what would, I would consider to be a relatively wide range versus where we typically be guiding middle of the way through the year. First is just the impact to tenant sales on variable rents. It's not a normal year as we continue to normalize following the pandemic and dealing with what's going on today in the macroeconomic environment. So that's one variable that contributes both to the wider range on NOI, as well as FFO. And then we do have a relatively large pipeline of land sales we have spoken about previously. Those can close in one quarter versus the other. So there is some variability there. Those are really the two biggest drivers Greg.

And so I guess kind of what's included then from the land sales side or what's the expectation? And then on the tenant sales, have you had much success in terms of converting those leases back to mostly base rent?

On the land sales side, I'll just say that we are probably going to finish the year $0.02, $0.03 ahead of where we were last year to give you a sense for that. We haven't provided specific guidance, but it is a pretty large contributor to FFO. So I think it's important to highlight that. And then as far as converting variable to fixed rent, yes, we are finding a great deal of success as we renew 10, 12, 15 stores at a time. Primary focus is to lock that in on a fixed rent basis, obviously, to get growth in our aggregate rents, but also to lock it in on a fixed rent basis with annual bumps. So we're finding great success in doing so. Doug, anything to elaborate on that?

No, you nailed it Scott right on.

And just to clarify. So what's the expectation then in terms of tenant sales contribution or [overage] rent when we think year-over-year?

We're not giving specific guidance on percentage rent line item by line item. I'll say that our perspective this year is a little bit better than it was six months ago when we were first speaking about guidance. Tenant sales started off relatively strong, almost 8% for the first half of the year. So as a result, our percentage rents are a little bit better, which has contributed somewhat to the increase in our NOI range over the last couple of quarters.

We’ll go next to Derek Johnston with Deutsche Bank.

So your team has successfully secured debt extensions for the year. Now I believe only two, but relatively larger refinancings, are left in Santa Monica and Washington Square, and not till late this year and both are high quality centers. So do you have any early indication on rate or bank's willingness to work with you on these loans? I mean, anything you can provide here I think would be helpful.

To respect the process that we have going on with those lenders, I'm not going to be too specific. But I would expect that we'll be successful recasting those loans. They could be short term in nature just given what's going on in terms of the financing markets. Obviously, you mentioned what's happening in my opening remarks. So it could be that those are short term in nature. And then we get another bite of the apple couple years down the road. The rates on those are relatively low, as you see, and I would expect some tick-up in rates. But again, to respect the process that's going on right now, I won't be able to provide any further specifics.

And then just leasing. The 2Q print showed really undebatable solid leasing volumes, and paired with positive total base rent growth. So what type of demand are you seeing for the second half of the year? Is tenant demand changing in any way, shape or form, any pushback on rate given economic slowdown or any leasing notables positive or negative you could share are always helpful?

It's hard to predict what the second half of the year will be like. We've certainly seen a very strong first half from all different types of uses. And as we've raised occupancy 240 basis points over the last year, that's given us more ability to push rate. Initially coming out of COVID, we were chasing occupancy a little bit, occupancy had gotten down to 88%, which is our all time low. But now that we're getting close to where we were pre-COVID, which is 94%, it gives us a lot more ability to push rate. And in terms of tenants pulling back, I'm going to turn it over to Doug, because we have surveyed almost all of our major retailers to get their opinion on what they're going do with open to buys.

And to Tom's point, with all the noise going on in the economy and the somewhat uncertainty, we thought it prudent to actually proactively reach out to the retailers, the national retailers and we did that. We probably surveyed between 25 and 30 top national retailers to take their temperature on their open divides. And I would say the vast majority of them, probably 90% have not changed but are open buys, and are going to continue on with what they promised in 2022 and 2023, and that’s as of today. So the demand is still there.

We'll go next to Craig Schmidt with Bank of America.

What is tempering leasing spreads? I mean the 0.6, I mean, your sales are growing strong, your cost of occupancy seems pretty attractive. But what do you think is keeping your leasing spreads from going mid single digit to even double digit?

That's a good question, Craig and frankly, a question I put forward to our leasing team every couple weeks. We are kind of at that friction point now where there is not that much space left and we can start pushing rate. So I would expect that to change. It can fluctuate quite a bit quarter-to-quarter. But as you point out, our occupancy cost now at 11.7% is significantly lower as a result of increasing sales than it was pre-pandemic, which was about 13%. So as we go forward, I would expect that we should be able to get some more traction as it relates to re-leasing spreads.

As we've talked about on previous calls, when we hit our trough in occupancy during the pandemic, we were all about driving occupancy, and we did that. So as Tom mentioned, we are at that sort of inflection point right now where we've taken enough supply off the table to be able to focus more and more on rates. So I think you are going to see those spreads increase in the next two quarters.

And then just, you have opened a couple of new entertainment centers Round1 and Dave & Buster’s, and I know you still have plans to introduce entertainment, I think to Santa Monica Place and some other of your centers. What are you seeing from them in terms of traffic generation to your properties where you have introduced these entertainment concepts?

That use, that category is extremely strong right now. And there was a lot of uncertainty coming out of the pandemic if this category was going to perform the way it did pre-pandemic. And we have seen nothing but great results from any of the entertainment uses that we put in. And clearly, their success is our success, because they do drive a ton of footfall to our centers, they are very destination oriented.

We’ll go next Floris Van Dijkum with Compass Point.

So I guess to start off with, can you quantify what your signs not open pipeline is in terms of percent or basis points?

It's about 2% within our leased occupancy is signed but not yet open, and that again is small shop space. In some cases, you have got anchor locations, which are not reflected in that number. Tom mentioned that in his prepared remarks that those units, which are large cash flow contributors, will not come online until ‘23, ‘24. So those will be important drivers of cash flow. And bear in mind, of course, as we recaptured anchor space that was paying very little to no rent from the former department stores, that's a pretty handsome spread on those that just is sight unseen to you. So about 2% in our small shop numbers.

And if you were to quantify that as a dollars amount, what can -- do you have that number as well?

We don't have that…

And that would include the anchor space, presumably, that would be interesting as well. And then I guess my follow up question would be on the -- is there a big difference in terms of refinancing debt, whether you're obviously -- it presumably would be easier if you're having a discussion with the bank as opposed to a CMBS servicing. Could you remind us again, in particular, Santa Monica, I believe is CMBS, Washington Square, whether that's CMBS or whether that's a bank? And then I guess the other big one is Green Acres early next year. And maybe can you talk about the difference in discussions that you're having?

We've approached both balance sheet lenders as well as CMBS servicers over the last 18 months or so to secure those extensions, actually 24 months almost. So we're working with both sets, both groups. And really it's a pretty open dialog. You talked about where the assets positioned and what's going on today, everybody recognizes that the market is pretty disfunctional. Again, just to emphasize, not just for malls it's is across the board. We've seen it impact the industrial sector and the multifamily sector, the lodging sector. I think, you're probably familiar with what's happening. So they're aware and they're very willing to work with you. I would say, and I think I've mentioned this in the past, our assets are very well positioned from a debt yield standpoint. Certain of those assets, I think, will still generate significant liquidity to us, should we choose to take out that liquidity next year. So these are well positioned assets and as you mentioned, high quality when you're thinking about Santa Monica Place, Washington Square, Green Acres, et cetera.

I mean the one thing is that, if you were to take out additional proceeds out of any loan, would that be used to unencumber some assets? Is that how you're thinking about it?

Generally used to pay down debt will be strategic about what type of debt we repay, but yes, that will be the primary focus.

We'll go next to Alexander Goldfarb with Piper Sandler.

So two questions. First, Scott on the guidance, obviously, the Fed's been pretty active on rates and doesn't show any signs of slowing down. But if I look at your interest guidance for the year from last quarter, which was 267 and now is 272, I would've thought it would've gone up more. A number of the other REITs have definitely been revising up their interest expense expectations for this year and even next. So maybe just a little bit more color, because it sounds like maybe this is playing into some of your land sales and what your debt pay down thoughts are. So just want to better understand how you’re viewing floating rate debt and interest expense given this is much smaller than it would've expected.

I don't have the exact numbers in front of me, but we made a similar change three months ago to our interest expense guidance. It was roughly $0.02 or so. So we had already reassessed three months ago, and this is just an incremental change. So two incremental changes and I think you will find it's relatively comparable to perhaps what you have seen with other coverages that you have.

Alex, one thing to keep in mind is we have a very small amount of floating rate debt, only 12% of our total debt is floating. So as rates move, it takes a while for us to be impacted because we only in a given year are refinancing three or four secured mortgages. So there is not an immediate impact. And certainly probably a lot of the other companies you report on probably have a much higher percentage of floating rate debt.

So Tom, what you're saying is even inclusive of these refinances -- loan extensions you are doing where the rates are going up, this guidance obviously includes that and it sounds like what you're saying.

No, that's true. And again, keep in mind, it's only going to be a partial year. By the time we get these extensions and restructurings done, you are only talking about a partial year and that's…

Second question is on the same store. The back out for the non same store pool was pretty dramatic in the year ago period and this year is pretty -- it's actually positive. Scott, maybe just a little bit more color on what those adjustment factors are, the $35 million that was backed out of the year ago period, and then the 206 that's added to this year's period to get from total portfolio to adjust down to same store?

Specifically for the audience referring to Page 8 of the supplemental, the biggest change is the $35 million adjustment from last year. Two factors in there. One is the retailer investment income that we mentioned in our prepared remarks, that was the lion share of it. And then two, we did dispose of a couple of assets last year, La Encantada, North Bridge, and those are non same center adjustments in that same center reconciliation table on Page 8. So that's what you see there.

We’ll go next to Linda Tsai with Jefferies.

In terms of the portfolio sales growth, are there certain pockets of retailers seeing strength versus others?

Year-to-date, actually all categories have been positive with the exception of shoes. So we are seeing it across the board.

And then I realize this is still a few years out, but regarding the stadium. How do you view -- how do you weigh the NOI that goes away with the portion of the Fashion District that you're providing to the developers with the growth that results and the remainder of the center from the stadium being built?

As you said, it's out there a few years. But if you remember Fashion District Philadelphia was opened -- had it's grand opening in November of 2019. So we were releasing into the fourth quarter and then COVID hit. So the reality is today is we have got available space. It's envisioned that one third of the space we have would be end up being the arena and two thirds would remain retail. So we have got the room to move most of those tenants from one section of the property to another and that's part of what's going on today, as we speak. So we have got the ability to do that really without losing any NOI. And obviously, we expect that the traffic, the excitement, the volume of people, the commerce that an arena would bring would certainly be a very much a positive for our leasing. Even though it's a few years out, we think we'll start seeing an impact fairly quickly. And again, this deal is a deal it's not done so we can't elaborate too much on it, but we expect to close with HBSE sometime in ‘23.

We’ll go next to Michael Mueller with J.P.Morgan.

I guess first given the inflation levels that we've seen, are the new lease escalators that you're signing into leases today materially different than the escalators that you were baking into leases pre COVID?

No, identical. 2% to 3% on base rent, 4% to 5% on recoveries, taxes are a pass through. So it's the same structure and obviously, more healthy cash flow stream as we recast some of those short term variable deals from the COVID period.

And then second question. What is the temporary leasing percentage today and where do you think that could go to by the end of say 2023?

Yes, it's about, mid 7s today and I think it's realistic to assume we could probably get 150, 200 basis points of improvement over the next year and a half.

We’ll go next to [Greg Newman] with Citi.

I guess my first question maybe dovetails to an earlier question, but you guys have highlighted the sales per square foot number several times this call. But earlier question also referenced the fact that the rent growth has been a little bit more modest. And I'm just kind of curious if you were to inflation adjust those sales per square foot number or maybe look at it on sort of an operating profit basis for your tenants. I mean, is the cost of occupancy actually as good as it looks in the supplemental when you're kind of factoring in the cost pressures that all your tenants are facing, and maybe that's why you're not getting the rent growth?

It's hard to pinpoint a specific reason for that part of -- it is just the number of deals that come up in a given quarter and are negotiated. Our tenants really have not complained much about inflation and the impact on what's going on with them. Obviously, the wages are under pressure. Supply chain issues largely have been resolved. Their biggest complaint really is the availability of labor. And as a result of that in many cases they've got to pay more for that labor. That's where we're getting the biggest complaints in terms of number of complaints. And in terms of the occupancy cost as a percentage of sales, no, I think that's a valid reflection on what's happened as a result of sales increases primarily.

And then just second question, I'm just curious on One Westside with Hudson. Are they still in the exclusivity period on buying at your interest in that property, or where are you in that process of potentially just selling that interest and using those proceeds to pay down debt.

So that's an asset that has been turned over to Google. Google is doing their build out. I think expectation is for them to occupy the space either later this year or early next year. Our partner has a call on that asset. We have a put on that asset. But right now we like the asset and we like the NOI that's going to be thrown off from that asset. So we're not really in a hurry to do anything there. But we both have the right to do that if and when either one of us chooses to do that.

We will go next to Todd Thomas with KeyBank Capital Markets.

Tom, first question you mentioned that traffic remains steady at roughly 95% of pre-COVID levels during the quarter. A lot's happened in the last three or four months and it looks like the first quarter was stronger than the second quarter in terms of sales growth. And I'm just curious if you could talk about how traffic and sales trended within the quarter sort of April through June, maybe into July, whether there has been any trends or changes within the quarter?

I think the big difference on sales. First quarter of '22 was going against a very weak first quarter of '21, because that's right when Omicron hit. And we had a big surge in COVID and people were back to wearing masks and things just slowed down. Compared to the second quarter of '21, which is our comp right now that we're talking about, that was a very strong quarter because things bounced back pretty quickly there. So I think that's a difference in the sales activity. In terms of traffic, it's holding steady at 95% and people are tending to come in and they know what they are looking for, they're in and out quicker and that has a bearing on the traffic numbers. But the reality is the rate continues to be higher than it was pre-COVID because sales are higher than they were pre-COVID. So it's not a bad situation. I think consumers are just more educated when they come in.

And just remind me what's embedded in the guidance in terms of sales growth in the back half of the year?

We are not getting too detailed in terms of our sales estimates, Todd. I would say again this -- I would say this that percentage rents -- our outlook on percentage rents is better than it was six months ago just given how we have started the year. But we're certainly not being overlay aggressive in terms of our tenant sales assumptions here, that's one of the reasons we have got a range here. So we'll see how the balance of the year plays out.

Because keep in mind a lot of the retailer sales are cyclical and they fall in the fourth quarter. So it's hard to get a real accurate view on what percentage rent is going to be until you see their fourth quarter numbers, and that's when they go over the break point. And under the accounting rules, you can't recognize percentage rent rateably through the year, you have to do it only once they have exceeded their annual break point. So that's why we have got the range. And last year was a record year and we did not forecast another record year on top of that, it's somewhere in between where we were pre-COVID in last year.

And then if I could just follow up on another question. I think previously you discussed a bunch of large format retailer openings at a number of centers that are underway with rent commencing through '24, I guess the next couple of years. What's the expected spend through '24 to generate the NOI associated with those REIT redevelopments, and sort of what's the NOI yield on that spend? I guess how much NOI are you looking at commencing on an annualized basis from some of these larger format anchor tenants? Because if we look on page 33 in the supplement, it doesn't look like that's the totality of the projects that you're discussing on. And I was just wondering if you could give us a little bit more detail in both the spend and the associated NOI.

Todd, on the spend, it's roughly -- a $100 million is going to be spent this year for the full year and about $150 million next year. And the vast majority of those are the large format deals that we're talking about and those deals have been signed not paying rent yet. I think Floris asked the same question regarding how much of that -- quantify how much rent that is. I think we don't have that number at our fingertips but it's fairly significant. And return on cost on those projects is going to be around in the 10% to 15% range on average.

And those will commence over the next -- through ‘24, you'll see those rents come online…

Yes. I mean some of the big ones are fairly elaborate build outs, like Scheel’s sporting goods, for example and some of the other big uses. So it's going to be ‘23 and ‘24 and so that's going to be obviously an NOI lift that's not in the numbers today it's in the occupancy, but it's not in the NOI.

We'll go next to Haendel St. Juste with Mizuho.

This is [Ravi] on the line for Haendel St. Juste. Have you seen any difference in sales productivity on a relative basis between Sunbelt and Coastal markets?

No, we really haven't. Our sales have been pretty much consistent both from a category standpoint and from a geographical standpoint.

Just one more here. I know there haven't been a lot of trades recently. But can you give us a read regarding where transaction cap rates for Class A malls stand right now in this environment?

Well, you're right, there have been no trades, so it's really hard to pinpoint where that is today. There haven't been any trades for a number of years so we really don't have anything to point to there.

[Operator Instructions] And at this time, there are no further questions. I'll turn the call back to Tom O'Hern.

Thank you. Well, we've enjoyed a solid start to 2022 and we look forward to reporting our results for the balance of the year over the next several months. Thank you.

This does conclude today's conference. We thank you for your participation.