The Macerich Company - Q4 2022
February 7, 2023
Transcript
Operator (participant)
Greetings. Welcome to The Macerich Company Q4 2022 earnings call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Questioners, we ask you please limit your time to one question and one follow-up question. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. I will now turn the conference over to your host. Samantha Greening, you may begin.
Samantha Greening (Director of Investor Relations)
Thank you for joining us on our Q4 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 in our SEC filings, including the adverse impact of the novel coronavirus 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 supplementals filed on Form 8-K with 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.
Tom O'Hern (CEO)
Thank you, Samantha. We are pleased to report another strong quarter with the majority of our operating metrics continuing to trend very positively. After a solid first three quarters of 2022, we had a very strong Q4. Although tenant sales were flat in the Q4 versus a very strong Q4 of 2021, we were up 3% for the year. Our average sales per square foot for tenants under 10,000 square feet was $869, a 7% increase over 2021. We continue to see traffic at about 95% of pre-COVID levels, but tenant sales are exceeding pre-pandemic levels with year to date sales up 13% compared to the same period in 2019.
The quarter continued to reflect retailer demand that is at a level that we have not seen since before the great financial crisis. Some of the other Q4 highlights include occupancy, which ended the year at 92.6. That was a 110 basis point improvement from the Q4 of 2021 and a 50 basis point sequential quarter improvement over the Q3 of 2022. We continue to see strong leasing volumes which for the year were in excess of 2021 levels. For the quarter, we executed 261 leases for 900,000 sq ft. Doug will be providing more detail on that in a few moments. We saw same center NOI growth of 2% in the Q4 compared to the Q4 of 2021, which was a very strong quarter and a tough comp.
FFO per share for the quarter came in at $0.53. For the year, FFO was $1.96, which was about $0.03 ahead of consensus. On January 27th, we declared a dividend of $0.17 per share, payable March 3rd to record holders as of February 17th, 2023. Since our last earnings call, we've had a significant amount of financing activity, which Scott will elaborate on shortly. The debt markets for our A quality town centers is improving, and we're getting our deals done. We continue to focus on redevelopment and repositioning of our top quality centers. Much of this work is mixed use, diversification and densification. Some examples of that include at Kierland Commons, we're moving forward with a 110 unit luxury apartment project, which leverages a developable surface parking lot at this highly attractive open air center.
At Flatiron Crossing in Broomfield, Colorado, in partnership with a national residential developer, we are planning a 330 unit luxury multifamily project centered around 2.5 acres of public amenities. At Biltmore Fashion, we're advancing plans for a 10 story, 250,000 sq ft class A office tower, including best of class retail and food and beverage. Plans are also evolving for a 250 unit luxury apartment complex at Biltmore. At Scottsdale Fashion Square, we're moving forward with plans for multifamily residential and up to 500,000 sq ft of class A office. This is in addition to the remerchandising of the Nordstrom wing with luxury brands and dining, which is well underway.
At our flagship, Tysons Corner Center, we're building upon the highly successful phase one mixed use development that brought Tysons Tower, VITA and the Hyatt Regency to the center. We're using a portion of our 2.4 million sq ft of available entitlements to plan for another mixed use project. Recently, we announced the addition of ARTE MUSEUM at Santa Monica Place. Arte is an immersive digital art destination, which is expected to occupy 48,000 sq ft of space on the third level of the property in the former ArcLight theater space. Arte expects to attract one million visitors per year. It's a great entertainment addition and a major traffic generator that will bring tremendous energy to the third level of Santa Monica Place. As Doug will elaborate on shortly, we continue to be pleased with the strength of the leasing environment.
As expected, given the depth and breadth of the leasing demand, we've had a very robust leasing result in 2022. The leasing interest continues to come from a wide range of categories. That includes health and fitness, such as Life Time at Broadway and Scottsdale Fashion Square. Food and beverage usage, including Pinstripes and Round1. Entertainment such as ARTE MUSEUM, and sports such as SCHEELS and Dick's Sporting Goods. Co-working, hotels, such as Caesars Republic at Scottsdale, and multi-family projects at Kierland, Flatiron Tysons. Interest continues at levels we've never seen before. Bankruptcies continue to be at a record low. We continue to expect gains in occupancy and net operating income as we progress through 2023. Now I'll turn it over to Scott to discuss in more detail the financial results for the quarter, significant financing activity and guidance for 2023.
Scott Kingsmore (SVP and CFO)
Thank you, Tom. On to the highlights of the quarterly financial results. This morning, we posted solid operating results for the Q4. Same center NOI increased 2% versus the Q4 of 2021, excluding lease termination income. For the year, same center NOI increased 7.5% versus 2021, excluding lease termination income. This was consistent with our prior estimates and our prior guidance. This is the second straight year of NOI growth that has exceeded 7%, with 2021 same center NOI growing 7.3% over 2020. FFO per share for the quarter was $0.53 and was $1.96 per share for 2022. The quarterly result was equivalent to FFO per share during the Q4 of 2021, which was also $0.53 per share.
Similar to our same center NOI growth result, this FFO result was consistent with our prior estimates and prior guidance. FFO per share exceeded street consensus, as Tom mentioned, by roughly $0.03 a share. Primary and offsetting factors contributing to this quarterly FFO per share result are as follows. One, we had a $7 million increase in straight line of rent due to straight line of rent from the Google lease at One Westside, as well as from straight line receivable write-offs during the Q4 of 2021, as we then finalized our remaining pandemic tenant-related receivables last year. Secondly, a $4 million increase from same center NOI. Third, a $4 million relative improvement in valuation adjustments pertaining to our retailer investments, net of taxes. Offsetting these three positive factors were the following.
One, a $7 million increase in interest expense due to rising rates. Two, a $5 million quarterly decrease in FFO generated from land sales. Three, a $3 million decline in lease termination income. On to guidance. This morning, we issued our initial guidance for 2023 FFO, which is estimated in the range of $1.75-$1.85 per share. Here are some details underlying the guidance. This FFO range includes an estimated same center NOI growth range of 2%-3%. This FFO range includes an estimated decline in lease termination income from $25 million in 2022 to a more normalized $10 million in 2023.
In terms of the quarterly cadence for 2023 FFO guidance, we expect 23% in each of the Q1 and Q2, 25% in the Q3, and the remainder in the Q4 of 29%. Primary factors to reconcile between our 2022 actual FFO that we've just reported and this 2023 estimated FFO are as follows. Same center NOI growth is estimated to contribute $0.08 of FFO. Secondly, $0.05 of FFO is estimated to come from a relative improvement in valuation adjustments pertaining to our retailer investments, net of taxes. These factors are offset by a $0.21 increase in estimated interest expense due to rising rates. Secondly, a $0.07 decline in lease termination income. Lastly, approximately a $0.02 decline in non-cash straight line of rental income.
To emphasize, our 2023 outlook continues to reflect healthy operating cash flow of roughly $315 million before payment of dividends. More details of the guidance assumptions are included within the company's Form 8-K supplemental file, financial information, specifically on page 15. It was filed earlier this morning. On to the balance sheet. We continue to make good progress in our financing pipeline. In early December, we closed a three year extension of our $300 million CMBS loan on Santa Monica Place. The extended loan carries a very attractive floating rate of LIBOR plus 1.48%, which is converted to SOFR probably in the next two to three months. The loan now matures on December 9, 2025, including extension options.
On January 3rd, as we turned the page on the calendar year, we closed a $370 million five year refinance of the previous $363 million of combined loans that formerly encumbered the Green Acres campus, both on the mall and the power center, both of which were scheduled to mature in the Q1 of 2023. This new CMBS loan bears a fixed interest rate of 5.9%, is interest only during the entire term, and matures on January 6th, 2028. The company's joint venture that owns Scottsdale Fashion Square is in the process of refinancing the existing $405 million mortgage loan. The new five year loan is expected to be a fixed rate that will run.
The loan balance will be $700 million, and that is expected to generate roughly $150 million of incremental liquidity to the company. This CMBS loan is expected to close within the coming several weeks. At year-end, we had $512 million of available liquidity. Debt service coverage was a healthy 2.7 times. Net debt to forward EBITDA, excluding leasing costs at the end of the quarter, was 8.8 times. Now I will turn it over to Doug to discuss the leasing and operating environment.
Doug Healey (SVP of Leasing)
Thanks, Scott. We closed out 2022 with very strong leasing metrics and leasing volumes. In fact, 2022 was a record leasing year dating back to before the global financial crisis when viewed on a same center basis. Q4 sales were basically flat versus Q4 2021. For the full year, 2022, sales were up almost 3% when compared to the same period in 2021. Given the very strong sales volumes we saw in 2021, it was a very difficult year to comp positively against. Sales per square foot as of December 31st, 2022, were $869, down just a little from our record of $877 at the end of the third quarter. Trailing twelve-month leasing spreads remained positive at 4% as of December 31st, 2022.
That's down from 6.6% last quarter and essentially flat when compared to December 31st, 2021. In the Q4, we opened 226,000 square feet of new stores. For the full year of 2022, we opened almost 900,000 square feet of new stores, which is just about on par with where we were during the same period in 2021. Notable openings in the Q4 include Anthropologie at Biltmore Fashion Park, Aritzia and Timberland at Fashion Outlets of Chicago, Free People at the Oaks, Freebird at Kierland Commons, lululemon at SanTan Village, The North Face at Washington Square, and three stores with JD Sports at Country Club Plaza, Scottsdale Fashion Square, and Victor Valley. In the luxury category, we opened Brunello Cucinelli, Dolce & Gabbana, and Gucci Men, all at Scottsdale Fashion Square.
We also opened Shake Shack at Kings Plaza and Capital One Cafe at Country Club Plaza. In the digitally native and emerging brands category, we opened Alo Yoga at Kierland Commons, Brilliant Earth at Santa Monica Place, Everlane and Oak + Fort at Tysons Corner, Fabletics at Broadway Plaza and Chandler Fashion, and Vuori at Kierland Commons and Village at Corte Madera. Let's look at the new and renewal leases we signed in the Q4. In the Q4, we signed 261 leases for just over 900,000 sq ft. For the full year 2022, we signed 974 leases for 3.8 million sq ft. As I mentioned earlier, 2022 was a record leasing year dating back to before the global financial crisis when viewed on a same center basis.
Our focus in the Q4 was in large part addressing our lease expirations, finalizing 2022 and getting a head start in 2023. In doing so, in the Q4, we signed over 200 renewal leases with almost 100 different brands totaling 640,000 sq ft. With that, we now have commitments on 52% of our 2023 expiry square footage, with another 27% in the letter of intent stage. These figures are virtually unprecedented at this early stage in the year. Given the noise and uncertainty that exists in the macroeconomic environment, I'm pleased with these statistics as we are basically taking a great deal of risk off of the table in 2023.
2022 is also a year of newness for us, bringing new, unique, and emerging brands with a major initiative for our leasing team and a way for us to really reimagine and differentiate our town centers from our competition. To that end, in 2022, we signed over 100 leases with 88 new to Macerich brands totaling 440,000 sq ft. Examples include ARTE MUSEUM, as Tom mentioned, Hermès, Balenciaga, Everlane, Oak + Fort, Parachute, Reformation, Roark, Rothy's, and Samsung. That's just to name a few. Turning to our leasing pipeline, at the end of the Q4, we had 140 leases signed for just over two million sq ft of new stores, which we expect to open in 2023, 2024, and early 2025.
In addition to these signed leases, we're currently negotiating nearly 100 new leases for stores totaling about a half a million square feet, which will also open in 2023, 2024, and early 2025. In total, that's over two and a half million square feet of new store openings throughout the remainder of this year and beyond. I wanna emphasize, these are new leases with retailers not yet open and not yet paying rent, and these numbers do not include renewals. I can tell you that this leasing pipeline of new store openings now accounts for $62 million of incremental rent, and this represents approximately 8% of our current net operating income. This incremental rent will continue to grow as we approve new deals and sign new leases. To conclude, our leasing and operating metrics were very solid in 2022.
Sales in 2022 outpaced 2021 by nearly 3%. 2021 was a very strong year to comp against. Occupancy is up 110 basis points since the end of 2021 and up 410 basis points in all these seven quarters since our trough at the end of Q1 of 2021. We expect this trend to continue throughout 2023. Leasing spreads remain positive and will also continue to improve as we increase occupancy. There were no bankruptcies in our portfolio in the Q4 and only three for all of 2022. Bankruptcies overall are at their lowest level since 2015, which is consistent with our significantly reduced tenant watch list.
Leasing volumes were at record levels when viewed on a same center basis, the result of which is a very strong, vibrant, and exciting pipeline of tenants slated to open this year and into 2024 and even 2025. I mentioned this last quarter, but I think it's worth repeating. Although the future remains unknown, and despite the macroeconomic backdrop and looming potential recession, to date, we continue to see very little pullback from the retailers. I think this is the result of the very healthy retailer environment that exists today, as well as a testament to our best-in-class portfolio of superregional town centers. Now I'll turn it over to the operator to open up the call for Q&A.
Operator (participant)
Thank you. At this time, we will be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Again, we ask questioners to please limit your time to one question and one follow-up, and you may rejoin the queue to ask further questions. Our first question comes from the line of Derek Johnston with Deutsche Bank. Please proceed with your question.
Derek Johnston (Senior REIT Lead Analyst)
Hi, everybody. Thank you. Thanks for the puts and takes and guidance, Scott. I was wondering, you know, what bad debt assumptions did you forecast in guidance, you know, given the macro backdrop, and, you know, any background assumptions on retention ratios or insights or further insights into the $10 million in lease termination income would be helpful.
Doug Healey (SVP of Leasing)
Thanks, Derek. Good afternoon. Bad debts we expect to be very normal, not significant at all, That's consistent with what we're seeing. Again, Doug mentioned our, excuse me, our tenant watch list is very low. Incidents of bankruptcies are low, so we don't expect a significant amount of bad debts. That's kind of consistent also with the level of lease termination income dropping so significantly from $25 million last year down to an estimated $10 million this year. There's just, there's a lot less volatility. Those numbers obviously escalate during times of volatility. We expect, you know, that environment to be much more normal.
Derek Johnston (Senior REIT Lead Analyst)
The retention ratio, the last part of that question.
Doug Healey (SVP of Leasing)
Thanks, Derek, for the memory jog. We have, you know, for the last several months, last several quarters, frankly, experienced very strong retention rates. you know, at times where we're remerchandising space, we're certainly choosing to take that offline and upgrade the merchandising mix, which results in some downtime. Generally, we're seeing very strong retention rates as we've talked to retailers about renewing their fleet.
Derek Johnston (Senior REIT Lead Analyst)
Okay, thanks. Let's shift to leasing, right? I mean, you know, clearly, the way it looks right now, according to you, the deal pipeline, you know, is shaping up pretty strongly. Are you seeing any shifts given the macro uncertainty? I mean, clearly, 2021 and 2022 were solid leasing years. I guess the question is, are retailers still pushing through with expansion projects in your view? You know, how are leasing and rent negotiations progressing or changing early in 2023? I guess lastly, like you've been through downturns before, are you seeing any leading slowdown indicators at this point? You know, any further leasing info certainly is valuable.
Tom O'Hern (CEO)
Derek, I'll start, I'll pass it off to Doug. We're seeing actually quite a bit of interest with, I would say, even heightened sense of urgency to get deals documented and done. You saw we just announced a big one at Santa Monica Place, there's two or three that are gonna follow that are not subject to mentioning the retailer's name yet, you'll be seeing announcements within the next few weeks. If anything, we're seeing a heightened sense of urgency to get deals done and documented, not a lot of pressure on rate, at least on the bigger, higher profile deals. Doug, you might care to speak more of the, you know, the inline spaces and
Doug Healey (SVP of Leasing)
Yeah. Hey, hey, Derek. I mean, it's early, it's early days in 2023, but I can tell you, and I mentioned this in my remarks, that to date, we've really seen no retailer pullback. Retailers are honoring the leases they signed. They're opening the leases they signed, and they continue to negotiate the leases that are out. and I think, you know, if you think about it, we have a very, very healthy retailer community out there, environment, and so many of the retailers that were suffering pre-pandemic failed during the pandemic. We're left with a lot of big public companies that are long-term in nature and are really being opportunistic when it comes to best-in-class real estate, which we have.
Derek Johnston (Senior REIT Lead Analyst)
Thanks, guys. That's it for me.
Operator (participant)
Our next question comes from the line of Greg McGinniss with Scotiabank. Please proceed with your question. Greg from Scotiabank, you're now live for questions.
Greg McGinniss (Director)
I apologize. I was on mute. Rookie mistake. I apologize if I missed this in the opening remarks, what was, what's the land sales expectation built into 2023?
Tom O'Hern (CEO)
Hey, Greg. 2022, we had about $0.09 of FFO from land sales net of taxes. We still have a pipeline that we're executing on numerous transactions that are under contract. If we're looking at 2023, I'd say that'll land somewhere between 40%-50% or so of 2022 levels.
Greg McGinniss (Director)
Okay, great. Thanks, Lynn. Back to that leasing on that pretty sizable pipeline that's expected to open up over the next few years here, I believe you said it's 2.5 million sq ft, if I'm not mistaken. What's the net increase in NOI that's expected to benefit from that? Is that occupancy already reflected in that 92.9% just to, yeah.
Tom O'Hern (CEO)
Greg, the occupancy does reflect that pipeline, it's included in the 92.6%.
Greg McGinniss (Director)
Okay.
Tom O'Hern (CEO)
The pipeline of square footage is two million square feet, although Doug is rapidly trying to add to that. It's a top priority for us to get that space, you know, signed. We've got to get it open because really the high fives come when the tenants start paying rent. I think Scott or Doug may have mentioned that $62 million of incremental revenue top line that may not all hit NOI because obviously we're in, you know, inflationary times, and we're fighting some rising operating costs, but the vast majority of it will. I'd estimate, you know, we can see north of $55 million of NOI pickup as a result of getting those pipeline deals open and paying rent.
Greg McGinniss (Director)
Okay, that was a net number. Thank you.
Operator (participant)
Our next question comes from the line of Craig Schmidt with Bank of America. Please proceed with your question.
Craig Schmidt (Managing Director and Senior Equity Analyst)
Thank you. One, I was just wondering, are you still getting signs from the consumer that they want more restaurants at your property? How has the success rate been of the restaurants that you have opened in the last couple of years?
Doug Healey (SVP of Leasing)
Hey, Craig. It's Doug. Yes, restaurants, food and beverage, fast cash, continues to be a huge priority for us. In fact, food and beverage and restaurants were the highest comping in terms of sales in our portfolio in 2022. There is a lot of demand, and we are seeing, if you read what's out there, we are seeing a shift in sales from traditional apparel and retail to services, including travel and including restaurants. To answer your question, yes, we're seeing it, and the demand's there.
Craig Schmidt (Managing Director and Senior Equity Analyst)
Great. Then maybe you can tell me a little bit about ARTE MUSEUM at Santa Monica Place. The visitors seem very impressive, but what exactly would you be seeing at the museum?
Tom O'Hern (CEO)
Well, it changes constantly, Craig. They control the content. It's immersive video, so you walk in and you feel like you're part of it, you know, a wave crashing over you, for example. You can go to their website. They're open I think they've got one other US location, maybe in Las Vegas. They certainly generate a lot of interest, a lot of traffic, a lot of visits, and we think it's gonna be very beneficial for the third level of Santa Monica Place. We're, we're hoping the concept can travel a little bit through the rest of our portfolio. It's exciting. There's nothing really like it around, and it's gonna be a tremendous addition.
Craig Schmidt (Managing Director and Senior Equity Analyst)
Great. Thank you.
Operator (participant)
Our next question comes from the line of Samir Khanal with Evercore ISI. Please proceed with your question.
Samir Khanal (Fundamental Research Analyst)
Hey, Scott or Tom, how are you thinking about variable rent or percentage rent this year with the conversion to fixed rent? I guess, you know, on that point, is there any sort of potential upside from sort of international tourism coming back, whether it's from China or other areas?
Tom O'Hern (CEO)
Yes, Sameer. good afternoon, or should I say morning. You're out here now on the West Coast. We expect percentage rents to continue to decline as we renew leases and convert those variable rents to or excuse me, to fixed rents. That's a concerted effort on our part. We saw some of that in 2022, I think you'll see that accelerate in 2023. You know, we've just by frame of reference, we've budgeted our sales to be neutral in 2023. You know, we'll see how the rest of the year pans out in that regard. We'll certainly see variable rents continue to convert over to fixed rents. Sameer, on your second part.
Samir Khanal (Fundamental Research Analyst)
Go ahead. Sorry.
Tom O'Hern (CEO)
The second part of your question was?
Samir Khanal (Fundamental Research Analyst)
No. with international tourism coming back, you know, I mean, from China or other areas, is there a potential upside to that number, you think? I mean, are you baking in any, sort of upside to the percentage rents coming from international tourism coming back here potentially.
Scott Kingsmore (SVP and CFO)
No, we're not getting that specific. If you think about it, you think about the revenge spending that occurred domestically here in 2021. As the Asian consumer gets back out into the world, you know, we'll certainly see some benefit, probably see some benefit in markets like Santa Monica and Chicago and Tysons Corner. We're not building that into the guidance, there's certainly room to think that as those consumers start to venture into the United States, that we'll see some of that international tourism that's been missing for the last few years start to return.
Samir Khanal (Fundamental Research Analyst)
Any color you can provide on sort of what your assumptions are for occupancy for 2023? How much of a occupancy pickup will we see, you think?
Tom O'Hern (CEO)
Well, we're gonna continue to push that. Obviously, the higher the occupancy gets, the tougher it is to get there. We were about 94% pre-COVID, dropped as low as 88, we've, you know, we've leased our way back to 92.6%. You know, our expectation is to be somewhere between 93.5% and 94% by the end of next year.
Samir Khanal (Fundamental Research Analyst)
Got it. Thank you, guys.
Tom O'Hern (CEO)
Thank you.
Operator (participant)
Our next question comes from the line of Floris van Dijkum with Compass Point. Please proceed with your question.
Floris van Dijkum (Managing Director and Senior Research Analyst)
Thanks. hey, guys.
Tom O'Hern (CEO)
Hi, Floris.
Floris van Dijkum (Managing Director and Senior Research Analyst)
Hey, question, where you think, what points do you expect you're gonna recover 19 levels of NOI in your portfolio? Obviously, your portfolio has changed a little bit over the last couple of years. You made a couple more asset sales, et cetera. It would be good for maybe for the market to get a sense of what the reference point is and how quickly you can get there. Obviously, clearly, your guidance assumes a slowdown in your NOI growth from the 7%+ levels that you've achieved over the last two years. Maybe we can get some comment on that as well when you get a chance.
Tom O'Hern (CEO)
Well, the same center growth, I mean, that's coming against some very tough comps. You know, 7% growth, you know, for two years in a row, that's extraordinary. That's a little bit, you know, out of the norm, and this year we're getting back to a more normal level. In terms of when we get back to pre, you know, pre-COVID NOI levels, you know, we've said for some time we believe it's gonna be, you know, around the Q4 of 2023 and going forward from there. It'll track to some extent with the occupancy level as we get closer to that 94%, which we're pushing for this year. We think we'll be there in the Q4, and that's not inconsistent with what we've said, you know, the past few quarters.
Things are moving along nicely, and if Doug keeps doing a great job with his team on the leasing front, we'll get there later this year.
Floris van Dijkum (Managing Director and Senior Research Analyst)
Thanks. Maybe if you can one comment or if I can get your comments on your recovery ratios. One of the things that obviously you're you know part of what's gonna be a drag on your earnings a little bit and your NOI growth this year is the fact that expenses are going up, perhaps, in excess of your fixed CAM bumps, which will you know which could drag your NOI growth, which benefits from your 3% bumps and your occupancy gains and hopefully some positive lease spreads as well. If maybe you can give a little bit more comment on what's happening. In new leases, are you asking and receiving higher fixed CAM? What other initiatives do you have underway that improve your recovery ratios?
Presumably, moving from a turnover-based rent, and temp tenancies to permanent tenancies, should hopefully improve your recovery ratios and your margins as well going forward.
Scott Kingsmore (SVP and CFO)
Yeah, Floris. We, as you know, we've been a fixed CAM shop for many years. In fact, most of our leases are on a fixed CAM basis with annual escalators that are in the ranging, between 4%-5%. You know, if I were to say 2022 and 2023 inflation has resulted in an abnormal increase in our shopping center expenses, perhaps that slightly outpaced the annual bumps that we were getting in fixed CAM. Bear in mind, year after year, leading up to this hyperinflationary environment that we're currently experiencing, we've been, you know, clipping along with annual increases that well surpassed inflation. I think we've had, you know, plenty of, call it, quote-unquote, bank, you know, to absorb the increases that we're dealing with right now in operating expenses for things like labor and real estate taxes and insurance.
We're certainly going to see, you know, we are getting those fixed bumps, you know, in our deals with very rare exception. We're certainly gonna see our recovery rates continue to improve as we convert temporary space, which today is about 7.5% of our occupancy, over to permanent. We'll certainly see a continued growth in our recovery rates from that.
Floris van Dijkum (Managing Director and Senior Research Analyst)
Great. Thanks.
Operator (participant)
Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.
Alexander Goldfarb (Managing Director and Senior Equity Analyst)
Hey, good morning out there. Two, two questions. First up, Tom, on the sales, obviously, we know, you know, stuff can be, you know, you always get a mix in sales. Curious, in the Q4, sales were down relative to Q3. Is this? You know, mix? Is it inflation like our tenant I understand obviously tenants are strong, they're, you know, they're leasing. We firmly understand that. At the sales level, are customers pulling back or was it a mix of what merchandise they were buying? Just I would have thought in the Q4, you know, people splurge and go out with a bang for the holidays and then maybe pull back once they get the credit card in the Q1.
Tom O'Hern (CEO)
Yeah, Alex, the comparison was versus the Q4 of 2021. Sales in the Q4 of 2022 were flat with the Q1 of 2021. 2021 was a very strong quarter, Q4 of 2021. We weren't uncomfortable with that result. We were up 3% for the year. In terms of traffic and activity, the consumer is still there and proving to be very resilient. We weren't necessarily concerned about what happened with sales and traffic in the Q4. It was just going against a very tough Q4 of 2021.
Alexander Goldfarb (Managing Director and Senior Equity Analyst)
Yeah, I was comparing it to Q3 trailing twelve to Q3 versus trailing twelve to Q4, but I'm guessing your response would be the same. Second question is, on the going back to the occupancy build, you guys clearly got a lot of lease term in 2021 and 2022, recaptured a lot of space. Your overall occupancy is still a few points behind your public peer, although they have a different portfolio composition with outlets and malls versus you guys. It would seem like you guys would still have a lot of oomph in the tank, if you will, on occupancy rebuild that would get maybe better NOI growth.
Are there other things there, is that maybe it's just the length of time it takes to physically open the space, get the tenant in that's really the hindrance, so the occupancy build will come in time, but maybe it's just physically getting it there? I'm just sort of curious because it seems like you guys would-
Tom O'Hern (CEO)
You're right about that. I mean, you know, we announce the deals the day we sign them, they go into occupancy. In some cases, if you look at something like a Pinstripes or a Life Time, it's gonna take, you know, close to a year to get it built out, and it doesn't start hitting NOI until the build out. A lot of the stuff that we're talking about today, like ARTE MUSEUM, you know, we're gonna get the benefit of that in 2024 and 2025, as it relates to NOI growth, but not in 2023. That big pipeline does bode well for the NOI growth as we look forward into 2024 and 2025.
Alexander Goldfarb (Managing Director and Senior Equity Analyst)
Thank you.
Tom O'Hern (CEO)
Thanks.
Operator (participant)
Our next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.
Linda Tsai (SVP and Equity Analyst)
Hi. Thanks for taking my question. Sorry if I missed it, but did you outline bad debt expectations for 2023?
Scott Kingsmore (SVP and CFO)
We spoke about that just briefly, Linda. We do not expect those to be significant at all. As a result, we just did not disclose the guidance. It wasn't trying to be opaque or anything, but we just do not expect that to be significant. It's a very, very small line item when you're looking at a company that generates, you know, nearly $800 million of NOI.
Linda Tsai (SVP and Equity Analyst)
Thanks. Then what's demand like right now from digitally native retailers? That's something that you've talked a lot about in the past. Is that still kind of going on at the same level of velocity as you've seen in prior quarters?
Doug Healey (SVP of Leasing)
Hey, Linda, it's Doug. I would say that the digitally native, the ones, the retailers that are currently online that are starting to open bricks and mortar stores, that slowed compared to the last two, three, four years. You think about the brands that were born online that turned into bricks and mortar retailers. Think about Warby Parker, and think about Vuori and Allbirds. They were all born online, but now they're just basically traditional retailers. They have as much business in their bricks and mortar than they do online. The new ones are slowing, but the ones that are emerging are really picking up.
Linda Tsai (SVP and Equity Analyst)
Thanks for that. Just one last one. Are the luxury retailers turning their store opening plans back to Asia given the reopening? You know, what are you seeing as it relates to domestic demand from the luxury retailers?
Tom O'Hern (CEO)
Where that's most relevant for us, Linda, is at Scottsdale Fashion Square. We had such great success with the luxury wing and the food and beverage that we added a couple of years ago that we're converting the Nordstrom wing to luxury brands. The demand has been very strong. Not a big sample size to speak to your question, but where we are looking to, you know, put in luxury brands, we're having pretty strong demand. I don't see it pulling back at all. Do you, Doug?
Doug Healey (SVP of Leasing)
No, not at all. It's only gonna get better.
Linda Tsai (SVP and Equity Analyst)
Thanks.
Operator (participant)
Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.
Todd Thomas (Managing Director and Senior Equity Research Analyst)
Hi. Thanks. Good morning out there. Just a question about the same store NOI growth forecast of 2%-3% as occupancy is expected to increase, which you indicated, and it appears rent growth is, you know, holding steady here. Obviously a lot of other factors, including the expenses and recovery income that you discussed. Can you just provide a little bit more detail around that build up to the 2%-3%? Sort of, I guess, my question is, you know, what's kind of holding it back a little bit? You talked about, you know, the $62 million of incremental rent or I suppose $55 million of NOI that, you know, is expected to come online. You know, that's pretty significant growth off your current base. I'm just curious if you could talk about that a little bit and a little bit more detail around the 2%-3%.
Scott Kingsmore (SVP and CFO)
Sure, Todd, this is Scott. The biggest factor, you know, and I think we touched on it earlier, is downtime. You know, as you take large space off the market, most of which is committed, some of which is not, you know, you've got downtime which impacts you. As we took a step back as we were doing all of our detailed work looking at our business plan for 2023, we realized that coincidentally or not, some of our better space and some of our higher rent generating space in our New York assets were in fact spaces that we're taking offline. You know, that downtime certainly cuts against growth. You touched on the other component, obviously.
Tom O'Hern (CEO)
It temporarily cuts against growth. It ultimately. We talk about the $55 million of incremental pipeline, that doesn't all hit in 2023. You know, significant percentage of that hits in 2024 and maybe some of it even in 2025. As Scott is saying, as we take space offline, it's a temporary hit to NOI to be picked up as we put the new tenants back in.
Scott Kingsmore (SVP and CFO)
Todd, just refer to the disclosures we have on our pipeline. Those will actually get a little bit better than the one we had, over Investor Day because of the improved leasing demand that we continue to see. You can take a look and see what the incremental pipeline is by year.
Todd Thomas (Managing Director and Senior Equity Research Analyst)
Okay, that's helpful. How much of the $62 million or that leasing pipeline, how much of that is in the same store?
Scott Kingsmore (SVP and CFO)
The vast majority of it is same store. We don't have a lot of development, ongoing development projects that are significant where we pull anything out, north of 95%.
Todd Thomas (Managing Director and Senior Equity Research Analyst)
Okay. Just last question, on the occupancy specifically, you're looking to sort of be in that 93.5%-94% range by the end of the year. Just in terms of seasonality, you talked about sort of low levels of bankruptcy and last year was obviously very muted in terms of what occupancy was lost after the holidays. Do you have visibility on what that sort of seasonal occupancy decline might look like early this year? Whether that'll be similar to 2022 or more of a historical sort of average if we think about that occupancy trend throughout the year.
Scott Kingsmore (SVP and CFO)
Yeah, we're really gonna see occupancy, physical occupancy tick up by the time we get to the end of the year. Today when we looked at physical versus leased occupancy at the end of 2022, it was approaching nearly 3%, which is pretty elevated for us, Todd. As our pipeline continues to get built out, the new stores, start to open and start to pay rent, we'll see that gap, start to narrow. I expect physical occupancy will really start to pick up in the latter half of the year, which certainly sets up a good backdrop for cash flow and NOI growth in 2024.
Todd Thomas (Managing Director and Senior Equity Research Analyst)
What about seasonally moving from, you know, Q4 2022 into early 2023, right, Q4 to Q1, sort of Q1 to Q2? Are you expecting any seasonal occupancy loss, or do you expect this to be another year where there's just very little, you know, muted, sort of levels of occupancy loss early in the year?
Scott Kingsmore (SVP and CFO)
You'll always see a drop after the Q4. You know, January is typically when leases roll. You've obviously got the temporary tenancies which are seasonal in nature, and those guys may roll off. You'll always see a little bit of a tick down from the Q4 to the Q1er. It could perhaps be a little bit less. We'll see how that pans out, but that's just traditional with our business.
Tom O'Hern (CEO)
Yeah. Historically, if you go back over the last 15 or 20 years, it's been a range of, you know, 20 basis points to 60 basis points decline between the Q4 and end of the Q1, and I would expect that it'd be very similar this year.
Scott Kingsmore (SVP and CFO)
Yeah. If I recall, Todd, last year it was about 40 to 50.
Tom O'Hern (CEO)
Yep. Correct.
Todd Thomas (Managing Director and Senior Equity Research Analyst)
All right. Thank you.
Tom O'Hern (CEO)
Thanks, Todd.
Operator (participant)
Our next question comes from the line of Mike Mueller with JPMorgan. Please proceed with your question.
Mike Mueller (Senior Equity Research Analyst)
Yeah. Hi. Scott, what is the actual retailer valuation income assumption in the 2023 forecast? I think you said it was about $0.05 higher year-over-year, but what's the number?
Scott Kingsmore (SVP and CFO)
It's about $0.01 in aggregate, very small. Very hard to predict also, you know, where these market valuations are going to be, but it's nominal in 2023 to be conservative.
Mike Mueller (Senior Equity Research Analyst)
Got it. Okay. On some of the densification opportunities that you talked about, can you just run through some rough timelines?
Tom O'Hern (CEO)
Those are really gonna run, some happen. The ones I mentioned, relating to multifamily, it takes a little while to get the entitlement perfected and move forward. Those are gonna mostly hit in 2024 and 2025. As it relates to, you know, the retail projects such as SCHEELS Sporting Goods and ARTE MUSEUM, those will be open late 2023 or into 2024. It's a variety. We expect to spend about $150 million, Mike, in 2023, and I would expect a like amount in 2024 to get those entitlements up and going. Biltmore might be a little further out there as we perfect the entitlement there. That's probably more like a 2025 opening, 2024-2025.
Mike Mueller (Senior Equity Research Analyst)
Okay. Thank you.
Tom O'Hern (CEO)
Thanks.
Operator (participant)
Our next question comes from the line of Ki Bin Kim with Truist. Please proceed with your question.
Ki Bin Kim (Managing Director of U.S. REIT Equity Research)
Thanks. Good afternoon. Can you just talk about the trends in operating costs that we should expect in 2023? As these costs go up, you know, as, and as you post higher lease spreads, I'm curious how much of those higher lease spreads actually can translate into the bottom line versus maybe being dissipated into higher costs.
Scott Kingsmore (SVP and CFO)
Yeah. Our operating expenses will continue to tick up, Ki Bin. We expect about a 3%-4% growth in shopping center expenses. You know, it's a range of outcomes from labor costs to property taxes, big line item, insurance, big line item. You know, we'll see that. Leasing spreads are kind of independent, right? You manage your expenses in a fixed CAM world. You know, the spreads, your ability to generate pricing power is really driven by growth and occupancy and creating that tension between supply and demand. We think we're there. We've started to see spreads over the last two quarters in the mid-single-digit range. I think it's reasonable to assume we'll continue at that level. Doug, do you disagree?
Doug Healey (SVP of Leasing)
Yeah. No, I agree. The one thing I would add, Scott, is for the first time, probably since pre-pandemic, we're starting to see competition for space again, especially in our better centers, and that's just by definition gonna drive rate up. You know, you combine competition with increased occupancy, we're starting to see it in terms of driving rate.
Ki Bin Kim (Managing Director of U.S. REIT Equity Research)
When you negotiate with tenants, how often is the topic of crime and safety being elevated, when you discuss, you know, leasing with tenants? Can you talk about some of the things that you've done as a landlord, maybe in conjunction with the city to make a safer kind of shopping environment?
Tom O'Hern (CEO)
I'll take the second half of that. We work with all of our cities pretty closely. You know, Santa Monica, for example, we spend a lot of time with the, you know, various people in the city as well as the police chief to try to make sure that we make Santa Monica Place the safest environment possible for shoppers. We have a lot of urban properties, and as a result, we're very sensitive to those issues. I think, you know, one area that we don't scrimp on as it relates to expenses is security. We use one of the biggest firms in the country, if not the world, to handle our security.
It's something that we're in close communication with every single municipality we do business in, to be aware of issues that are happening. That's, you know, really all you can do. Doug, you can speak to the retailer side of it and how they're reacting or what kind of feedback you get.
Scott Kingsmore (SVP and CFO)
Yeah. Can we don't really negotiate security when we're negotiating leases. What I can tell you, and this is happening a lot, we're having the retailers' security departments reach out to us to partner with our security department and vice versa. There's meetings, there's functions, there's conventions, if you will, that marry up our security and the retailer security. We're starting to see a pretty dynamic partnership there. It's not really a function of the lease.
Ki Bin Kim (Managing Director of U.S. REIT Equity Research)
Okay, thank you.
Scott Kingsmore (SVP and CFO)
Thanks.
Operator (participant)
Our next question comes from the line of Craig Mailman with Citi. Please proceed with your question.
Craig Mailman (Director and Equity Research Analyst)
Hey. Just a question on what you guys are baking in from a perspective of delivery times on leases. I mean, are lead times getting better on that? Are you guys maybe taking or is there some conservatism and guidance around timing of some of that stuff that you're saying could be hit in end of 2023, early 2024? Is there any chance of that hitting earlier on?
Scott Kingsmore (SVP and CFO)
Craig, you know, Tom touched on it. Probably the most sensitive are the larger spaces that generate a significant amount of rent. Just as a practical matter, those take a fair amount of time to, you know, get permitted, get built out and ultimately start paying rent. I'm not sure that we're necessarily being conservative. We're trying to be as realistic as possible because, again, we've got a fair amount of this space that came back to us during the pandemic. It's exciting space. We really wanna get it open as soon as possible. Each circumstance is different. Each municipality you're dealing with is different. It's very space by space specific, and I think we've got a pretty realistic perspective of when we think that rent's gonna start to come online.
Craig Mailman (Director and Equity Research Analyst)
Are labor issues still a bottleneck for your tenants in terms of opening new stores, getting employees? Is that still an issue, or is that easing up on the margin?
Tom O'Hern (CEO)
Doug, I think it is easing up. I mean, we're talking to the retailers all the time, and that was a real issue, you know, last 12-24 months, but it's really quieted down.
Craig Mailman (Director and Equity Research Analyst)
Okay. just one last one on.
Tom O'Hern (CEO)
That and the supply chain issues that were often discussed in the last 24 months.
Craig Mailman (Director and Equity Research Analyst)
Right. Just on the financing side, you guys had mentioned Scottsdale, the new loan there is progressing. Are you guys looking at the same type of costs that you were at the Investor Day? Is there anything, you know, positive or negative on that front to report?
Scott Kingsmore (SVP and CFO)
Yeah, Craig. you know, during Investor Day, at that point in time, you know, the market was pretty locked up. As we started 2022, or excuse me, 2023, there's certainly a fresh allocation of capital. Bond investors are, you know, back in the game. Investment banks are starting to form pools. Transactions are getting done. Generally, we think it's going to be a slow first half of the year, and while things have improved, it'll take a little while for things to start to get back to normal, you know. All that said, we've seen a pretty significant rally in credit spreads over the last, say, four to five months versus the fall.
You've obviously seen, you know, benchmark rates, you know, 10 year treasury, five year treasury bounce all over the place, including over the last couple days with the recent employment report. Net-net, I think rates have improved to the extent the refinancing markets are open for certain assets. I think generally, rates have modestly improved, but it's very volatile still, and that could change on a dime. The good news is transactions are getting done. We've got one refinance complete. We've got one refinance expected within the next few weeks. More to follow as we look at the balance of the year. We do think that the second half of the year should be much better than the first half.
Craig Mailman (Director and Equity Research Analyst)
What do you think is a good placeholder for timing and rate on that loan?
Scott Kingsmore (SVP and CFO)
On the Scottsdale loan?
Craig Mailman (Director and Equity Research Analyst)
Yeah.
Scott Kingsmore (SVP and CFO)
That'll close in the Q1. If I were to guesstimate rate, it's probably going to be in the low to mid 5% range.
Craig Mailman (Director and Equity Research Analyst)
Thank you.
Scott Kingsmore (SVP and CFO)
Mm-hmm.
Operator (participant)
Our next question comes from the line of Ronald Kamdem with Morgan Stanley. Please proceed with your question.
Ronald Kamdem (Managing Director and Head of U.S. REITs Research)
Hey, couple quick ones. Just going back to some of the targets on leverage at the Investor Day at the end of 2023. Just trying to tie those comments with sort of the sources and uses. You talked about sort of $315 million in operating cash flow. You know, you take the dividend out, that gets you to $160 million. You know, after you sort of put development spending in, you don't really have a lot sort of left over. Just trying to get a sense of if that how we get to that leverage target. Is it just basically contingent on an equity raise or how to think about it?
Scott Kingsmore (SVP and CFO)
Yeah. We, if you look at that chart that we talked about on Investor Day, we did have a placeholder for a nominal equity raise. That doesn't mean we're committed to raising equity at $13 a share, but that was a placeholder in there if you look at the footnotes. In addition, NOI growth, certainly is an important component to us, ultimately getting our target leverage below 8%, or excuse me, eight times over the course of the next year or two. Those are the primary factors. You know, we think that we're certainly headed down the right path of achieving reasonable, NOI and EBITDA growth, between now and next year.
Ronald Kamdem (Managing Director and Head of U.S. REITs Research)
Got it. Going back to sort of the refinancing questions, just saw in Washington Square some of the pay down for that loan, only $15 million. Just curious for commentary, both generally in terms of what the servicers are asking for, and both specifically on Danbury Fair or Fashion Outlets at Niagara, if there's any updates there. Thanks.
Scott Kingsmore (SVP and CFO)
Every case is specific. You know, if you look at Santa Monica Place, it's an asset where there's still a fair amount of leasing to be accomplished. We talked about the ARTE MUSEUM with a couple other names, hopefully to be announced in the near future. If you were to let Craig had taken that asset to market, the outcome would have been dramatically different. An extension was very efficient for us. It resulted in no repayment of the loan proceeds. Again, that's one isolated example, but generally, you know, the extensions have been very efficient for both a liquidity standpoint as well as a rate standpoint.
Frankly, you know, Craig, if you, if you step back and look at what's happened historically, if you look at the Fed funds chart, when the Fed has increased rates, there's typically been a fairly significant fall off of those rates shortly thereafter. If you think about extensions for three to four years, not only is it efficient in the moment, it's very efficient from a rate standpoint because you're not locking yourself into higher rates for a longer period.
Tom O'Hern (CEO)
It's combining not just what we expect, in terms of rate, but also taking a look at the inverted yield curve and trying to find the right duration. If you combine those, you end up with a three to five year term, seems to work best for us, and that's the strategy we've pursued.
Scott Kingsmore (SVP and CFO)
If you, if you look forward, you know, we do have some financings that we do think we'll be able to get accomplished. A couple of the highlights for the balance of the year will be financing Tysons Corner towards the end of the year, obviously a marquee asset for us, and we think that should very well likely be an incremental liquidity event for the company. You know, we attempted to finance Danbury Fair last year. The markets closed up on a couple different occasions. I think it's very realistic to assume over the next several months that we could get that asset financed. It's got an awful lot going for it, trending in the, in the right direction from an occupancy and absorption standpoint.I think that's a financing we'll be able to get accomplished here within probably the next couple quarters.
Ronald Kamdem (Managing Director and Head of U.S. REITs Research)
Great. Thank you.
Scott Kingsmore (SVP and CFO)
Thank you.
Operator (participant)
We have reached the end of the question and answer session. I'll now turn the call back over to Tom O'Hern for closing remarks.
Tom O'Hern (CEO)
Thank you for joining us today. Again, we're pleased to report a strong conclusion of 2022. We look forward to reporting to you over the coming year as 2023 unfolds.
Operator (participant)
This concludes today's conference, and you may disconnect your line at this time. Thank you for your participation.