The Macerich Company - Q4 2023
February 7, 2024
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by. Welcome to Q4 2023 Macerich Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you would need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Samantha Greening, Director of Investor Relations. Please go ahead.
Samantha Greening (Director of Investor Relations)
Thank you for joining us on our Q4 2023 Earnings Call. During the course of this call, we'll be making certain statements that may be deemed forward-looking within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, including statements regarding projections, plans, or future expectations. Actual results may differ materially due to a variety of risks and uncertainties set forth in today's press release and our SEC filing. 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 SEC, which are posted in the Investors section of the company's website at macerich.com. Joining us today are Tom O'Hern, Chief Executive Officer, Scott Kingsmore, Senior Executive Vice President and Chief Financial Officer, and Doug Healey, Senior Executive Vice President of Leasing.
With that, I turn the call over to Tom.
Tom O'Hern (CEO)
Thank you, Samantha. By now, it's old news, but on Monday, we announced my pending retirement after 31 years at Macerich. So today is my 118th Macerich earnings call, and my last. I will miss all of you. I would like to say I'll miss all of you, but I'm not so sure about that. When I joined Macerich 31 years ago, it was to help Mace Siegel and Art and Ed Coppola take the company public. We did that in March of 1994. Our total market cap was a modest $650 million. Today, our market cap is $11 billion. We went from having a portfolio of malls in the mid-markets, doing about $350 a foot in sales, to a portfolio in major coastal markets, doing $836 per foot in tenant sales.
There's been a dramatic improvement in the quality of the portfolio, to say the least. When I joined Macerich in 1993, no way in hell did I think I'd be here 31 years later. Nothing in my Ironman background prepared me for a run of that duration. I will be forever thankful to my Macerich colleagues and friends for our collective accomplishments. Today, Macerich is extremely well-positioned for the future as I pass the baton of leadership over to a man most of you know, Jackson Hsieh. He's the right person to take the company forward and to continue to execute on our strategy of densifying and diversifying our portfolio of top-quality town centers. Regarding the upcoming leadership change, there's a detailed press release in 8-K on the topic, so I will refer you there.
So the remainder of this call, we will be focused on the quarterly results and the guidance and outlook for 2024. So now to focus on the quarter, I'm very happy to be leaving on extremely positive news. We had a strong Q4, which included Same-Center NOI of 3% for the quarter and 4.5% for the year. Occupancy is now up to 93.5%. That's a 90 basis point improvement over the end of 2022. We had a total shareholder return of 46% for 2023. That's a top 10 finish among all REITs. We posted positive re-leasing spreads of 17.2% for the year. We had quarterly EBITDA margin improvement of over 100 basis points versus the Q4 of last year.
Our partnership sold the One Westside office building to UCLA for a pro rata share of $175 million to Macerich. We did over $890 million of financings that was closed or committed in the Q4. More on that from Scott in a minute. We signed over 4 million sq ft of leases during 2023. That's an all-time Macerich record, and that's on the heels of the prior record, which was set in 2022. Portfolio average sales per foot was 836, down slightly from last year, but nonetheless, a top-quality sales productivity. Bankruptcies continued to be at a record low. We continue to expect gains in occupancy and net operating income as we progress through 2024 and into 2025.
Also, keep in mind, as a result of the very strong leasing activity in 2022 and 2023, we have a very large and healthy leasing pipeline with nearly 2.2 million sq ft of leases that have been signed but are not open yet. Once those tenants open, it is going to fuel our NOI growth in 2024 and 2025. Now I'd like to turn it over to Scott to discuss in more detail the financial results, earnings guidance, and the significant financing activity we had the past few months.
Scott Kingsmore (Senior EVP, CFO and Treasurer)
Thank you, Tom. This morning, we're extremely pleased to report a strong finish to the year. As Tom noted, Same-Center NOI increased 3% during the Q4 of 2023 relative to the Q4 of 2022.
... when excluding lease termination income. For the year, 2024, same-center NOI growth, excluding lease termination income, was a positive 4.5%. FFO per share for the Q4 was $0.56 and was $1.80 per share for 2023 for the year. The quarterly result was $0.03, or 5.7% more than FFO during the Q4 of 2022, at $0.53 a share, and was in line with consensus estimates for the quarter. FFO for the year was in line with our most recently issued guidance, which was a midpoint of $1.80 per share.
Primary major factors contributing to the quarterly FFO per share increase are as follows: One, a $11 million increase in rental revenues, which included, a $13 million increase in top-line minimum rent, $2 million increase in recovery revenue, which were offset by a, $4 million decline in percentage rent. These trends are consistent with what's been reported over prior quarters. They're driven by improved occupancy growth and rental rate, as well as a continued conversion from variable to fixed rent structures with CAM and tax recovery charges. Secondly, we had a $9 million increase in termination income. This was primarily driven by a single lease termination, deal, which was a very strategic transaction that we expect will facilitate a major future redevelopment opportunity.
These positive factors were offset by the following: One, an $11 million unfavorable increase in interest expense due to rising rates. This, this figure excludes accrued default interest, which is consistent with our reporting over the prior quarter. And then secondly, a $4 million decline in non-cash straight-line rental revenue, primarily from the conversion of GAAP to cash rents for the lease with Google at One Westside, which Tom mentioned, we've disposed of as of year-end. To recap, as we have emerged from the 2020 pandemic, same-center NOI growth, generated by our high-quality Class A portfolio, has been tremendous, with NOI growth averaging 7.4% in both 2021 and 2022, followed by 4.5% same-center NOI growth in 2023. We are extremely pleased with our resilient core NOI growth during the past three years.
This morning, we issued our initial guidance for 2024 funds from operations. 2024 FFO is estimated in the range of $1.76-$1.86 per share or $1.81 per share at the midpoint. Here are several details underlying this earnings guidance. The FFO range includes an estimated Same-Center NOI growth in the range of 2.25%-3.25%. In terms of quarterly cadence for our 2024 estimated FFO guidance, we expect approximately 21% in the Q1, approximately 24% in both the second and Q3s, and the remaining approximately 31% within the Q4 of 2024.
Primary major factors that result in a reconciliation between 2023 actual funds from operations and 2024 estimated FFO are as follows: Same-Center NOI is estimated to contribute roughly $0.10 of FFO this year. We had roughly $0.03 of FFO estimated from a relative improvement in valuation adjustments pertaining to our investment and direct investment in retailers. We had roughly a $0.015 year-over-year increase from the acquisition of our partner's interest in Freehold Raceway Mall, a transaction which closed in the latter part of 2023. These positive factors will be substantively offset by the following: one, a $0.07 increase in interest expense when viewed on the Same Center basis. Two, an anticipated 4-cent decline in land sale gains.
We've spoken about this in the past, this decline is due to the robust disposition activity from our land sale program that we've undertaken since 2021, which has significantly depleted our undeveloped land inventory that remains. Then lastly, about a $0.015 per share dilutive impact from increased share count, which is primarily driven from the company's various share-based compensation plans. To emphasize, consistent with 2023, our 2024 outlook continues to reflect healthy operating cash flow generation of approximately $300 million after recurring capital expenditures and leasing costs, but before payment of dividends. More details regarding our guidance assumptions can be found on page 15 of the company's Form 8-K supplemental that was filed early this morning. On to the balance sheet. Over the past few months, we have made considerable progress addressing our debt maturities.
In December, we closed a $710 million 5-year CMBS refinance of the $666 million loan on Tysons Corner Center. The new loan bears interest at a fixed rate of 6.6% and is interest only for the entire loan term. Also in December, our joint venture sold One Westside, as Tom alluded to, to UCLA for $700 million. The existing $325 million loan on the property was repaid, and approximately $78 million in net proceeds were generated at our 25% ownership share. In January, we closed a $24 million 5-year bank loan refinance of the existing $23 million loan on Chandler Fashion Center. The new loan bears variable interest at SOFR plus 2.5% and is interest only for the entire duration of the loan term.
In January also, we repaid the majority of the loan on Fashion District in Philadelphia. Roughly $8 million remains, and that matures in April and is anticipated to be repaid at that time. In January, we closed a $155 million, ten-year CMBS refinance of the existing $117 million loan on Danbury Fair. The new loan bears interest at a fixed rate of 6.39% and is interest-only during the majority of the ten-year loan term. We are currently working with the loan servicer on a multi-year extension of the $86 million loan on Fashion Outlets of Niagara, and we do expect this transaction to close later this month. Once closed on that Niagara extension, we will have a very manageable $400 million in maturities remaining in 2024 across three separate loans.
To recap the year, we've been extremely active in the debt capital markets during 2023 and year-to-date. So far in 2024, across 8 transactions, including Niagara, we will have refinanced or extended 8 loans totaling $2.9 billion or $2.1 billion at our ownership share. This activity included a 4.5-year renewal and upsizing of our $650 million revolving corporate credit facility during the Q3 of last year. Let's remind ourselves that closing was amidst a regional banking crisis within the United States. So we're very pleased with our activity throughout last year and to start this year. A year ago, we anticipated improvement in the debt capital markets during the latter portion of 2023, given that the Federal Reserve was expected to be then near the end of its historic rate hiking cycle.
In fact, that expectation has proven true. We're now finding significant opportunities to finance our assets within the sustained strong performance of our Class A retail. We also believe that we are benefiting from rotation of financing capital away from the office sector and into the Class A retail real estate sector. Our recent transactional activity supports that thesis. In mid-November, we acquired our partner's half share in Freehold Raceway Mall for $5.6 million and the assumption of our partner's share of debt. We now own 100% of Freehold Raceway Mall. We currently have approximately $657 million of available liquidity, which includes $490 million of capacity on our corporate credit facility. With that, I'll turn it over to Doug to discuss the leasing and operating environment.
Doug Healey (Senior EVP of Leasing)
Thanks, Scott. We closed out 2023 with very strong leasing metrics and leasing volumes. In fact, 2023 was a historic and record leasing year for Macerich, dating back 30 years as a public company. Year-end 2023 sales were down 1.8% from year-end 2022, and after a post-pandemic spike in spending across all retail categories, 2023 was clouded with increasing interest rates, inflation, and the constant threat of a recession. In addition, we've definitely seen a change in spending habits, with consumers now focusing on travel, dining out, entertainment, and other various services. This doesn't come as a surprise, and we expect 2024 to once again normalize and ultimately reflect more traditional consumer spending habits. Sales per square foot as of December 31, 2023, were $836.
That's down slightly from $847 at the end of the Q3, and that's primarily due to a decline in the sales of electric vehicles. Trailing twelve-month leasing spreads were a very healthy 17% as of December 31, 2023. That's up 660 basis points from the Q3 and up over 13% when compared to December 31st, 2022. In the Q4, we opened 391,000 sq ft of new stores. For the full year of 2023, we opened almost 1.6 million sq ft of new stores, which is 80% more square footage than we opened during the same period in 2022.
Notable openings in the Q4 include an expanded and newly reimagined American Eagle flagship at Tysons Corner Center, Five Below at Valley Mall, Levi's at Los Cerritos, Pandora at Stonewood, and North Face at Broadway Plaza and FlatIron Crossing. In the digitally native and emerging brands category, we opened Beyond Yoga at Broadway Plaza, Purple at Los Cerritos, Warby Parker at Chandler, and YETI at Washington Square. In the international category, we opened Aritzia and Intimissimi at Corte Madera, Lululemon at Freehold Raceway Mall, Uniqlo at Green Acres, Zimmermann at Scottsdale Fashion Square, and Zara at Queens Center. Lastly, in the experiential category, we opened CAMP at Tysons Corner and Round1 Spo-Cha at Arrowhead Towne Center. Now, let's take a look at the new and renewal leases we signed in the Q4.
In the Q4, we signed 186 leases for 1.1 million sq ft. For the full year 2023, we signed leases for 4.2 million sq ft, and that's up from 3.8 million sq ft, or 12%, when compared to the same period in 2022. As I mentioned earlier, 2023 was a record leasing year for Macerich over the past three decades. Notable new lease signings in the Q4 include Buck Mason, Kate Spade, Mango, Maggiano's, and Level99 at Tysons Corner, Round1 at Chandler, Dave & Buster's at Freehold, Launch and ShopRite at Green Acres, a second office lease with San Bernardino County at Inland Center, Arc'teryx at Washington Square, True Food Kitchen at Twenty Ninth Street, and Vuori at Scottsdale Fashion Square.
As always, our focus in the Q4 was in large part addressing our lease expirations, finalizing 2023 and getting a head start in 2024. In doing so, in the Q4, we signed over 130 renewal leases with 84 different brands, totaling 475,000 sq ft. With that, we're basically done with 2023 and now have commitments on 44% of our 2024 expiring square footage, with another 34% in the letter of intent stage. 2023 was another year of newness for us, once again, bringing new, unique, and emerging brands, 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 2023, we signed leases with over 80 new to Macerich brands, totaling just over 600,000 sq ft.
Examples include Beyond Yoga, YETI, Club Studio, ShopRite, Level99, Maggiano's, Elefante, and Catch, just to name a few. Turning to our leasing pipeline, at the end of the Q4, we had 126 signed leases for 2.2 million sq ft of new stores, which we expect to open in 2024, 2025, and 2026. In addition to these signed leases, we're currently negotiating another 80 leases for new stores, totaling almost 600,000 sq ft, which will also open in 2024, 2025, and 2026. So in total, that's over 2.8 million sq ft of new store openings throughout the remainder of this year and into 2026. And I wanna emphasize, these are new leases with retailers not yet open and not yet paying rent, and these numbers do not include renewals.
And I can tell you that this leasing pipeline of new store openings now accounts for $64 million of incremental rent, which represents roughly 8% of our current net operating income. And this incremental rent will continue to grow as we approve new deals and sign new leases. So to conclude, our leasing and operating metrics were very solid in 2023. There was only one bankruptcy in our portfolio in the Q4 and only 10 for all of 2023. And bankruptcies overall in both 2022 and 2023 were at their lowest levels since 2013, which is consistent with our significantly reduced tenant watch list. Leasing volumes were at record levels, the result of which is a very strong, vibrant, and exciting pipeline of tenants slated to open this year and into 2026.
As I've said in the past, and it remains the case, while there's still uncertainty in the macroeconomic environment, to date, we continue to see little pullback from the retailers. And I think this is a result of the very healthy retailer environment that exists today, as well as a testament to our best-in-class portfolio of super regional town centers. So given this and everything Tom and Scott discussed, we remain optimistic as we look to 2024 and beyond. And now I'll turn the call over to the operator to open it up for Q&A.
Operator (participant)
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please limit to one question and one follow-up. Please stand by while we compile the Q&A roster. The first question comes from Jeffrey Spector with Bank of America Securities. Your line is open.
Jeffrey Spector (Managing Director)
Great, thank you. And first, congratulations to Tom and Ed. Wish you the best in retirement. I guess, you know, probably appropriate first question would be for Jackson on, you know, the fact that Tom said, you know, you're the right person to take things forward. Talked about densification efforts, tremendous leasing is-- Jackson, what are you-- I know you just started, but, you know, could you provide some of your initial thoughts, like, should we expect any strategy changes at this, you know, do you have in mind?
Tom O'Hern (CEO)
Hey, Jeff, it's Tom. Jackson is actually not with us here.
Jeffrey Spector (Managing Director)
Okay.
Tom O'Hern (CEO)
He's enjoying some much-deserved time off. He starts March first, so I'll just ask you to hang on to that question till then, Jeff.
Jeffrey Spector (Managing Director)
Okay. Sorry about that, if I missed that.
Tom O'Hern (CEO)
No, no problem. No problem.
Jeffrey Spector (Managing Director)
If I could then ask Doug, and, you know, congratulations, Doug, on a great 2023 in terms of leasing. Appreciate all the stats you provided, including, you know, where you stand today on 2024. I think you said, you know, 80% commitments, square footage, 44% in LOI stage. I guess, would you be able to compare that to where you stood a year ago as you entered 2023, which turned out to be a record year? Like, how do you feel today versus one year ago?
Doug Healey (Senior EVP of Leasing)
Well, it's two parts to that question, Jeff. I think the first part, you were referring to our lease expirations. We're basically done with all of our expiring square footage in 2023, and we have commitments on 44% of our 2024 expiring square footage and another 34% in the letter of intent stage. So we're about 77% there with 2024 expiring square footage. I think the other part of the question really referenced more of our leasing pipeline, in which we said we had 126 leases signed for 2.2 million sq ft.
... That's just about, Jeff, where we were at this time last year, give or take, just a little bit.
Jeffrey Spector (Managing Director)
Okay, great. Thank you. Thanks for clarifying the, the stats. Then if I can ask a second question, what are you assuming in terms of bad debt, lease termination income in 2024? You know, and how does that compare, let's say, to 2023 or maybe versus historical? Thank you.
Scott Kingsmore (Senior EVP, CFO and Treasurer)
Hey, Jeff, I'll take that. This is Scott. Bad debts, we're assuming those to start to normalize a little bit more relative to 2023. I would say that's about a $0.02 headwind in 2024, against our same center. I don't expect those to be significant in the fullness of time, but I do expect them to be a little bit larger than they were in 2023, which frankly was a net reversal, and that was just a continuation of recovering some of those latent fully reserved receivables in 2023. I expect most of that to be out of the pipeline now, and it'll be trending a little bit more normal. Lastly, termination income.
We did provide line item guidance for that, which is $10 million, and that, that was down about $3 million or so, give or take, versus where we finished in 2020, in 2023.
Jeffrey Spector (Managing Director)
Great. Thanks, Scott.
Scott Kingsmore (Senior EVP, CFO and Treasurer)
Sure.
Operator (participant)
One moment for the next question. The next question comes from Greg McGinniss with Scotiabank. Your line is open.
Viktor Fediv (Senior Equity Research Associate)
Hello, this is Viktor Fediv here on with Greg McGinniss. I wanted to follow up on this lease termination income in Q4. I know probably you cannot provide some specific details, but overall, what type of tenant was that? And you mentioned that it opened some strategic opportunity for you to redevelop that center. So when it will occur, can you provide some more details on that?
Scott Kingsmore (Senior EVP, CFO and Treasurer)
Yeah, you're right, I can't speak to the specific tenant or the asset, frankly, other than to say, like I mentioned at the onset, that, you know, the lion's share of that termination fee, pretty much all, but, you know, roughly $1 million-$1.5 million of that, was from that single transaction. That transaction was an anchor location in terms of the type of space, but we do expect that to open up a really significant redevelopment opportunity. We are working on predevelopment and preplanning of that right now, as well as entitlement. Once we narrow down the scope and the exact cost and returns, which we expect to be, you know, the returns to be in the low double-digit realm, we will disclose that in our pipeline.
But, it is a good opportunity. We're very glad to get that transaction completed.
Viktor Fediv (Senior Equity Research Associate)
Got it. And then the second question, probably on leasing demand part. So given that department stores sales were weaker versus broad retail sales in 2023, do you expect more optimization to occur within that space? And have you had any conversations with your tenants about that already?
Scott Kingsmore (Senior EVP, CFO and Treasurer)
So, I'm not quite sure I caught all of that question. I would say this, though, and this is probably a good thing. As we look into 2024, I would not expect us to put up with the same type of volume that we did in 2023, because in all candor, we're running out of large format inventory. We're running out of boxes, big anchor locations. Over the last few years, since 2021, we've leased about 2 million sq ft in over 20 anchor locations, so it's been very productive.
Tom O'Hern (CEO)
Yeah, I think you're going to continue to see the shift away from department stores and into other big box uses. You saw us open Scheels Sporting Goods, for example, in a former department store space. You'll see us open Arte Museum in the former ArcLight theater space. We're going to continue to see different types of uses, diversified uses, taking the department store space and converting that into other uses that, frankly, drive more sales and traffic. That's a trend we've, you know, seen accelerating over the last five years, and that is going to continue as we go forward.
Viktor Fediv (Senior Equity Research Associate)
Got it. Makes sense. Thank you.
Scott Kingsmore (Senior EVP, CFO and Treasurer)
Thank you.
Tom O'Hern (CEO)
Michelle?
Operator (participant)
Our next question comes from Samir Khanal with Evercore. Your line is now open.
Samir Khanal (Analyst)
Hi, everybody. Tom, congratulations on your retirement. We will miss you. So Scott, just on same store NOI guidance here, you know, certainly leasing is very strong. Pipeline looks great into 2024, but I just want to kind of dive into the same store NOI growth, you know, that is moderating in 2024. Maybe help us think through the drivers of that lower growth in 2024 at this time.
Scott Kingsmore (Senior EVP, CFO and Treasurer)
Sure, Samir. I'll, I'll walk through it. You know, obviously, you know, great growth over the last 3 years, as I highlighted in my opening remarks. So, you know, for starters, we are dealing with some more, challenging comps. In addition, I would say, you know, operating expenses do remain, relatively elevated when you think of things like insurance costs, security, labor, I mentioned bad debts. Those are all, contributing to some headwind in same center that I would quantify at roughly 150 basis points or so, headwind in same center.
We are, you know, given the robust leasing environment and re-merchandising our space, we are taking space offline, so there is an element of downtime within that same center guidance, and I would estimate that kind of bracket at roughly 1% headwind in the same center. That's all positive, though, because we're taking, you know, underperforming merchants offline. We're putting in much more attractive merchants, much more diversified uses that will draw traffic and better sales volumes at better rent levels. So, that is what you typically see in a robust leasing environment. So those are really some of the major moving pieces. And then, of course, you know, as we do with each and every year, we do embed some reserves for the unanticipated in our guide.
Samir Khanal (Analyst)
Got it. And just from a modeling perspective, help us think through G&A for the year and also percentage rents. Thanks.
Scott Kingsmore (Senior EVP, CFO and Treasurer)
Sure. G&A, you know, I think if I were to point you to a run rate, look at 2023, and I would expect maybe a marginal decline versus 2023 and 2024 across management company expenses, net revenues, REIT expenses.
Tom O'Hern (CEO)
One other thing to keep in mind on the G&A line, Samir, if you take a look at our proxy, last proxy, page 50, you'll see the combined compensation for Ed Coppola and Tom O'Hern, and from the 8-K, you'll be able to ascertain the compensation for Jackson. That'll be a fairly significant reduction in G&A, just as a result of the CEO and president change.
Scott Kingsmore (Senior EVP, CFO and Treasurer)
And then, Samir, you also asked about percentage rents. If my memory is right, about 12 months ago, I said, you know, we do expect a roughly a 15%-20% decline in percentage rents into 2023 from 2022, and in fact, that played out. If you look at our percentage rents on a pro rata basis, they were down about 16% in 2023 versus 2022. And again, largely, that was a function of conversion of variable rent to fixed rent type structures. I think we worked through the vast majority of those at this point, Doug?
Doug Healey (Senior EVP of Leasing)
Yep.
Scott Kingsmore (Senior EVP, CFO and Treasurer)
I don't expect a lot more of that. As we look into 2024 and we're looking at, you know, percentage rent trends versus 2023, I expect those to continue to tick down, but not nearly as significantly as they did in 2023. You know, we're estimating roughly about a mid-single-digit decline in percentage rents. And, you know, some of that is just as you get escalations in base rents, you get an increase in breakpoints, so there's a natural transition, of variable rent to fixed rent on that basis. But I don't expect the, the type of leasing activity converting variable to fixed rent that we had in, 2023 at all.
Samir Khanal (Analyst)
Thank you.
Scott Kingsmore (Senior EVP, CFO and Treasurer)
Sure.
Operator (participant)
Please stand by for the next question. The next question comes from Floris van Dijkum with Compass Point. Your line is open.
Floris van Dijkum (Managing Director)
Great. Thanks, guys. Can you hear me?
Scott Kingsmore (Senior EVP, CFO and Treasurer)
We can hear you, Floris, loud and clear.
Floris van Dijkum (Managing Director)
It's great. Tom, congrats on the retirement. Good luck in your, in your next venture, whatever you wind up doing.
Tom O'Hern (CEO)
Thank you, Floris. I remember you when you were 25 and fresh out of UVA, and we were going to visit malls in Northern California.
Floris van Dijkum (Managing Director)
I remember that. That was. And by the way, it was one of my lowlights, actually, as some of you might have heard. But I don't know if I won't share that on this call. But yes, I do remember that. That was a memorable time. I had, I guess, you know, two questions for you. Number one, if you can, you know, one of the issues, I guess, with the mall sector, and you're not unique, I think some of your peers have had to grapple with this as well, but is the people don't think there's going to be much growth in the sector.
Can you maybe touch on, obviously, the underlying growth was very strong last year. You're expecting a little bit of a slowdown this year, probably, with some conservatism baked in, I would imagine. But maybe talk a little bit about, you know, some of the key drivers for growth. Obviously, you touched upon the S&O pipeline. Maybe, you know, can you give a little bit more color on, you know, what percentage of that S&O pipeline, for example, is luxury tenants? I know there's a big wing coming online at Scottsdale. How much of a driver of growth is that potentially for you going forward?
Tom O'Hern (CEO)
Well, I'll let Doug talk about luxury in a second, Floris, but, but as for people saying they don't see the growth in the mall sector, then they're clearly ignoring the facts. All you have to do is look at record leasing volumes in 2022 and 2023, and then drill down a little deeper and look at the types of tenants that are coming in, replacing traditional retail. You know, this isn't apparel retail, this isn't footwear. These are new uses, new and creative food and beverage, like Pinstripes, Life Time Fitness, for example, very actively coming in, and they can generate an additional 5,000 trips to the center a week, just that one tenant alone. Adding our 10th museum, they expect to have 1 million visitors per year coming to the top level of Santa Monica Place.
So there are a lot of exciting new uses that, frankly, we didn't have 10 years ago. I think whoever said they didn't see the growth driving to the mall business, the A quality mall business, was sadly mistaken, because all these new uses are driving traffic, they're driving sales, they're driving productivity, they're driving rent, and they're gonna drive NOI.
Doug Healey (Senior EVP of Leasing)
Hey, Floris, it's Doug. With regard to your specific questions about luxury, as you know, a few years back, we finished the luxury wing at Scottsdale Fashion Square, and the Neiman Marcus wing. And late last year, early this year, we're now focusing on bringing luxury, global luxury to the Nordstrom wing. I think a few calls ago, we announced Hermès, which is a bellwether tenant for that property, and we'll be announcing more over the next several months. But to Tom's point, you know, I talk about the leasing pipeline all the time, and, you know, it's 2.2 million sq ft, it's gonna open over the next two and a half years. Those are phenomenal numbers. But the thing that really excites me is the uses we're gonna be bringing.
So that, just all new uses, new exciting uses. You think about Din Tai Fung, and you think about Elefante, True Food Kitchen, Vuori, H&M, Primark, Dave & Buster's, Kiln, Life Time Fitness. Tom mentioned Pinstripes, Target, Level 99. I mean, that's really the beauty of this pipeline, not just the metrics, but the depth and breadth of uses that we're bringing to our town centers over the next 2-2.5 years.
Floris van Dijkum (Managing Director)
Great. Thanks, Doug. Maybe a follow-up with Scott. I know you mentioned that Niagara is going to get refinanced, and that might surprise some people, myself included, who thought that might transition back. I know you probably can't say a whole lot, but does this mean that you will be investing leasing capital in this asset on a going-forward basis? And what do you think that can do to the operations for this property going forward as well?
Scott Kingsmore (Senior EVP, CFO and Treasurer)
Sure. Floris, you're right. I can't speak in too much detail because the transaction's still, you know, in process. We do expect to secure a multiyear extension of that. You know, the asset still does generate some FFO. It certainly has its challenges, given its market positioning with north of the border in Canada and the local market. You know, there still is some opportunities for that asset, and we'll continue to capitalize on those opportunities. But, you know, the bottom line is, you know, it's a negotiation that's still in process. It's earnings accretive to retain that asset, and we'll report back once we close.
Floris van Dijkum (Managing Director)
Thanks, Scott.
Scott Kingsmore (Senior EVP, CFO and Treasurer)
Sure.
Operator (participant)
One moment for our next question. The next question comes from Todd Thomas with KeyBanc Capital Markets. Your line is open.
Todd Thomas (Managing Director and Equity Research Analyst)
Hi, thanks. First, Tom, Ed, congrats on your run. Best of luck in retirement.
Tom O'Hern (CEO)
Thanks, Todd.
Todd Thomas (Managing Director and Equity Research Analyst)
Let me first, I just wanted to take a stab at asking a prior question. I realize Jackson has not started yet, but Tom, you know, maybe Scott, I'm just curious if you can talk a little bit about where you think there might be opportunity for Jackson to have an impact as you think about the organization today and look ahead.
Tom O'Hern (CEO)
Well, Todd, I'm not gonna speak for Jackson. He'll be starting soon, and you can ask him directly. But I know he does like our strategy of densifying and diversifying our high-quality town centers, and he found that very interesting and appealing. Other things he may be considering, I will leave to him and let him articulate directly to you and others on this call.
Todd Thomas (Managing Director and Equity Research Analyst)
Okay. And, Tom, you're staying on for a few months as an advisor. You know, what kind of timeline would you expect for Jackson to get, you know, sort of fully situated with the platform, you know, touring assets, markets, you know, meeting with key retailers? What's the process like for, you know, for him really stepping into the CEO role?
Tom O'Hern (CEO)
Well, many of you on this call know him. I mean, he's gonna hit the ground running, I can guarantee you that. So I think there'll be, you know, a lot of travel, visiting our offices, visiting our people, and getting going. Ed and I are still on the board through our current term, which runs through May, so he will have access to both of us. And I imagine he's gonna be a very quick study and hit the ground running, so I think that'll all happen very, very quickly. And, you know, he's already fairly familiar with the company, did his due diligence, and I can almost guarantee you he will get a fast start.
Todd Thomas (Managing Director and Equity Research Analyst)
Okay, that's helpful. And if I could just get one in, for Doug. You know, appreciate the detail around the S&O pipeline and the lease signings and LOIs that you've executed around the 24 expirations. You know, can you talk about your expectation for tenant retention during the year and maybe discuss any, you know, known move-outs or, you know, post-holiday season seasonality that you're expecting this year, you know, relative to, you know, the last few years where there's been, you know, a lot less seasonality than there traditionally is?
Doug Healey (Senior EVP of Leasing)
Todd, it's Doug. Thank you. I think, and Scott, jump in here, but I think in 2024, our expectation is between 90% and 95% tenant retention, meaning our expirations, our 2024 expirations between 90% and 95%, we believe will retain.
Scott Kingsmore (Senior EVP, CFO and Treasurer)
And I think the second part of your question was regarding, you know, any unanticipated or just, you know, fallout following the holiday. And I won't say there's—I don't think there's anything out of the ordinary. You know, if we looked at, say, the 2016 through 2019 period, you know, we had some precursor, certainly in the fall, of tenants that were likely to close, and they were closing in fairly significant droves. We have not had that for the last few years at all. And I can't think of any retailer that said, "Look, we're gonna shut down five or six stores following the holiday season." Doug?
Doug Healey (Senior EVP of Leasing)
Yeah, Todd, we've talked about this a lot. I mean, many of the retailers that were suffering pre-pandemic just didn't make it through pandemic. And those that came through, came through in a very healthy way. And as I mentioned in my prepared remarks, there's a very, very healthy retailer environment out there with very strong balance sheets. I think the retailers, I know the retailers in 2023 and into 2024 already are speaking about managing the inventory levels, which is hugely important for their profitability and for their margins, which actually makes them stronger. So, you know, we're not seeing really any pullback, and our watch list is as low as it's ever been in 20 years. So I don't anticipate anything unusual in 2024, if you will.
Todd Thomas (Managing Director and Equity Research Analyst)
Okay, great. Thank you.
Doug Healey (Senior EVP of Leasing)
Thanks, Todd.
Operator (participant)
One moment for our next question. The next question comes from Michael Mueller with JPMorgan. Your line is open.
Michael Mueller (Executive Director)
Hey, Tom, congratulations. It's been great working with you over the years.
Doug Healey (Senior EVP of Leasing)
Thank you, Mike. Likewise.
Michael Mueller (Executive Director)
Yep, and I just have one quick one for Scott. Just curious, what's embedded in the 2024 guidance for NOI margin improvement, relative to what you had in 2023?
Scott Kingsmore (Senior EVP, CFO and Treasurer)
Yeah, Mike, I think we'll see continued margin improvement. You know, we've got improvement in rental rate. We've got growth in occupancy. Obviously, excuse me, the pipeline will start to add more and more as we get towards the latter half of the year. It's still a pretty thick pipeline. In fact, I think that pipeline yields roughly $64-$65 million of incremental rent over existing uses, so you know, that will be heavy in the second half. Conversely, like I said, we've got, you know, operating expenses continue to be somewhat of a drag, not a huge drag, but somewhat of a drag. So, but I do think by the time we get to the end of the year, you'll see continued margin improvement year over year.
Michael Mueller (Executive Director)
Okay. Thank you.
Operator (participant)
One moment for our next question. The next question comes from Ki Bin Kim with Truist. Your line is open.
Ki Bin Kim (Managing Director)
Thank you, and congrats, Tom.
Tom O'Hern (CEO)
Thank you, Ki Bin.
Ki Bin Kim (Managing Director)
Going back to some of the debt executions that you've done in 2023 and what you have left to do in 2024, are there some trade-offs that don't show up in the interest rate itself, things like, CapEx reserve requirements or other, clauses that might be a little bit more restrictive?
Scott Kingsmore (Senior EVP, CFO and Treasurer)
Yeah, I'd say, you know, we're always leaning into our underwriting to make sure that we're getting full credit for the pipeline. And, you know, given the depth of the pipeline, any one of these deals we're approaching, whether it's Tysons or Danbury, to the extent we have a tenant that's not yet come online, we do have to set aside that capital. It's effectively, I guess, when you think about it, it's pre-funding that capital, and then we drop back down over the next 6-12 months. And so, you know, for instance, for Tysons, I think there was an incremental $40 million, give or take, of liquidity. But a lot of that liquidity was soaked up in CapEx reserves for a lot of restaurant uses.
We've recently discussed Level99, which is new entertainment use on the east side of the center. So we did have to set aside the anticipated leasing capital to bring that use to opening and paying rent. But other than that, no, I'd say that the environment's pretty normalized. You know, and we're getting deals done. With again, liquidity is back open. I'm happy to say that we probably accounted for roughly 25% of the volume that occurred in CMBS, which was about a little over $7 billion of transactions in 2023. So, you know, the markets are open and functional. And, you know, as you can see from the rates, somewhere in the mid-sixes is where we've been transacting.
Ki Bin Kim (Managing Director)
What is like a broad refinance rate that we should assume for 2024 refinancings?
Scott Kingsmore (Senior EVP, CFO and Treasurer)
I'd say, you know, we've been transacting in the mid sixes, and that's probably representative of where we'll be, this year. You know-
Ki Bin Kim (Managing Director)
Okay.
Scott Kingsmore (Senior EVP, CFO and Treasurer)
We'll, we'll have to see what the, you know, what the Fed has in store for us for the next 12 months, but based on where we see the forward curve, that's probably a reasonable expectation.
Ki Bin Kim (Managing Director)
Okay, thank you.
Operator (participant)
One moment for the next question. The next question comes from Haendel St. Juste with Mizuho. Your line is open.
Ravi Vaidya (VP)
Hi, guys, this is Ravi Vaidya on the line for Haendel St. Juste. Hope you guys are doing well. Just had one or two questions here. Regarding leverage, can you please provide a full year end of year 2024 target? And would you consider issuing equity at current prices? I believe at the Investor Day, you referenced that you weren't looking to issue equity until the previous target, which was around $18 a share, and we're getting close to that at this point, so just wanted to follow up on that. Thanks.
Tom O'Hern (CEO)
Ravi, I'll take the second half of that question. We always reserve the right to issue equity, so I'm not going to give you a hard and fast rule in terms of a dollar amount. You've seen us, in the past, judiciously use our ATM, and we have an ATM in place today, and that's another tool in the capital toolkit that we keep available to us. It's certainly possible. And look, we're very focused on delevering over time. That can happen a few ways, one of which is to drive Same-Center NOI up, which we fully plan to do, and the other way to effectively reduce debt to EBITDA is via equity raises. We wouldn't preclude ourselves from doing that.
We do not have any of that in the guidance, but that's consistent with past practice as well. Scott, you want to comment on leverage?
Scott Kingsmore (Senior EVP, CFO and Treasurer)
Yeah, sure, Ravi. To your first part of your question, I think we could see 40-50 basis points of improvement in leverage by the time we get to the end of the year. Roughly 8.2 times is kind of where we're triangulating based on the business plan today.
Ravi Vaidya (VP)
Got it. Thank you.
Tom O'Hern (CEO)
Thanks.
Scott Kingsmore (Senior EVP, CFO and Treasurer)
Sure.
Operator (participant)
One moment for the next question. The next question comes from Caitlin Burrows with Goldman Sachs. Your line is open.
Caitlin Burrows (VP)
Hi, good morning there, and congrats, Tom, on your retirement.
Tom O'Hern (CEO)
Thank you, Caitlin.
Caitlin Burrows (VP)
Maybe starting with Santa Monica Place and Scottsdale Fashion Square, I feel like the expected openings are getting closer on those, and I think combined, they're supposed to have an incremental NOI of around $50 million at your share. So I'm just wondering if you can give some further detail on the timing of recognizing that NOI. Like, could it start in the first half of this year or any other details you can give?
Scott Kingsmore (Senior EVP, CFO and Treasurer)
Yeah, Caitlin, both of those projects are going to start to open in late 2024, early 2025.
Caitlin Burrows (VP)
Okay.
Scott Kingsmore (Senior EVP, CFO and Treasurer)
So I would say you'll see a full, you know, for the most part, you'll see a full impact in 2025, maybe a little bit of bleed into 2026. But looking at those individually, Scottsdale will start to open up a lot of those uses in fall. The renovation for that project, I think most of the scaffolding will be down and the physical work will be done by the time you get to the end of the quarter. But the, in terms of new tenants coming online, they'll start to come online in the Q4, and we'll see kind of the full year effect in 2025. Santa Monica, you know, we've got some exciting uses coming. First level, Club Studio, which is high-end fitness, third level, Arte.
Both of those are going to be coming on in the first half of 2025, so you'll see some bleed into 2026 there. Din Tai Fung will also be a use that we hope to get online, either the end of this year, beginning of next year. So all those are very accretive leases that we expect to to be on board, you know, certainly by Q2 of 2025.
Caitlin Burrows (VP)
Okay, got it. And maybe, you guys talked earlier in the call about how percent rents were down in 2023 because more was being shifted to base rents, which makes sense. I was wondering if you could go through any details on how much that kind of phenomenon impacted leasing spreads, like that the expiring ABR might have been somewhat lower, and related kind of the level of leasing spreads that you reported in 4Q of almost 20%. Do you think that's sustainable? Thanks.
Scott Kingsmore (Senior EVP, CFO and Treasurer)
Sure. Great question. Yeah, certainly, if you looked at our expiring rents in 2023, they were a lot lower than what we expect in 2024, and that was really driven, again, by, you know, all those, those shorter-term deals that we did during COVID, which had more variable rent. And we were accessing those throughout 2023 and renewing those on a longer-term, more typical fixed rent structure. So as we, you know, we reported trailing twelve, 17% spreads at the end of the year, and I would expect those base rent spreads to be roughly 50% of that level in 2024. Really, again, just a function of a relatively artificially low base rent expiring in 2023 and a more normalized level of base rent expiring in 2024.
Caitlin Burrows (VP)
Got it. Thanks.
Scott Kingsmore (Senior EVP, CFO and Treasurer)
Sure.
Operator (participant)
One moment for the next question. The next question comes from Nick Joseph with Citi. Your line is open.
Nick Joseph (Head of US Real Estate and Lodging Research Team)
Thank you. Just hoping you could walk through the capital needs and the funding plan for leasing-related CapEx and any incremental redevelopment in 2024.
Scott Kingsmore (Senior EVP, CFO and Treasurer)
Sure. You know, I think I mentioned in my opening remarks, Nick, good morning, by the way, good afternoon, that, you know, we do expect, after recurring CapEx and leasing costs, to still have generated roughly $300 million of operating cash flow before payment of dividend. As I look at 2024, 2025, 2026, development pipeline, I think will range between $150-$200 million over those three years, and we're probably somewhere around that midpoint of that for 2024. You know, we are. We've got probably 8-10 anchor boxes that we continue to work on, that will largely be retenanted and completed by the end of the year.
but we'll also be setting the table for some larger scale redevelopments, potentially Green Acres, potentially FlatIron for 2025 and 2026. So that'll, that'll give you an idea of some of the character of what we're spending on.
Nick Joseph (Head of US Real Estate and Lodging Research Team)
Thank you very much.
Operator (participant)
One moment for the next question. The next question comes from Alexander Goldfarb with Piper Sandler. Your line is open.
Alexander Goldfarb (Managing Director)
Good morning out there. Tom and Eddie, certainly, for two decades of working with you guys in REIT land, it's been awesome, and we'll miss our Nareit interaction. So wish you guys the best in your next endeavor. So I have two questions here. The first question is, Scott, on the Danbury Mall loan, and you know how much I like that mall, can you just help us walk through and interpret the $155 million new loan relative to, you know, the value of that mall, just given, you know, the sales that it does and the dominance in that northern region. Would think that the loan is underlevered relative to the value of the asset.
Obviously, you know, the market today is a tough market to do debt. So maybe just some perspective around how we should interpret the loan balance relative to where the market value of that asset would be, sort of in normal times, obviously, not, you know, right now when people are skittish.
Scott Kingsmore (Senior EVP, CFO and Treasurer)
Sure. Yeah, it's a great asset. It's virtually 100% occupied. I think there's one or two available storefronts, so very happy to get a, you know, 10-year deal on it, stagger out that maturity, et cetera, et cetera, especially at a, at a, at a very attractive rate. The, the loan-to-value, if I recall correctly, was in the low 40s, based on appraisal. You know, we typically, as you know, from following us many years, we typically finance in the 55% realm. So yeah, there's a little bit of liquidity on the table, but, you know, it's the state of the market today. And, you know, I think it was a, a great execution, hitting a window. And, you know, recall, we've been trying to finance that thing through a difficult capital market environment for almost two years.
So it was really nice to be able to hit a window and execute well at a good rate.
Alexander Goldfarb (Managing Director)
Okay, and then the second question is, on the, the JV, the Freehold and Chandler JV, you brought out, you bought out Freehold, but, Chandler still seems to be a JV. So maybe you could just talk a little bit about what drove the JV to sort of cleave off the one asset. I think you guys said $5.6 million that you used to acquire that. What was unique about that asset versus Chandler that still is in JV, or should we expect something to happen in the near future on Chandler as well?
Tom O'Hern (CEO)
Alex, really, we can't comment on what motivated or didn't motivate our partner. In that case, it was really their decision, but when given the opportunity, we liked the economics, we liked the asset. We had a chance to do that on Chandler, but that was really driven by them and their preference.
Alexander Goldfarb (Managing Director)
Okay. Thank you, Tom.
Operator (participant)
One moment for the next question. The next question comes from Ronald Kamdem with Morgan Stanley. Your line is open.
Ronald Kamdem (Managing Director)
Hey, congrats, Tom and Ed. Just two quick ones for me. Just on going back to the management transition, you know, obviously, can't comment for Jackson, but just about the process, the question really is: Is there any sort of specific skill set or experience that you guys were looking for? And can you just comment on why was sort of now the right time for this transition? Just trying to get a little bit more color around sort of the process, what you guys were looking for.
Tom O'Hern (CEO)
Yeah, Ron, I'll refer you to the press release in the 8-K. We did an exhaustive search. We used Ferguson Partners, very well-known firm that specializes in executive recruitment, and we considered a lot of candidates. Those of you that know Jackson know he's very qualified and very capable, and I think we've got an outstanding replacement. In terms of the timing, every CEO should really go out when their company is in a good spot and when they have their health. So that's why it's good timing. Macerich is in great shape, and I've got my health, so this is the perfect time for me to move on to all those things that I put on the back burner for the last 30 years.
Ronald Kamdem (Managing Director)
Understood. And then one on... So I saw the Green Acres Mall redevelopment announcement, I think, earlier this, I guess, last week or earlier this January, but I didn't see it in the supplemental. Is there—is that gonna be a large project? Like, how should we think about the economics and returns on that, or should we just wait for it, for that to be added?
Scott Kingsmore (Senior EVP, CFO and Treasurer)
Yeah, it's a wait. I think you'll see it hitting the pipeline. We are in predevelopment and entitlement mode right now. You know, it's going to be a very attractive project. Frankly, that's a gem. From the two assets that we acquired back in the 2012, 2013 timeframe, Green Acres has performed extremely well. We added a power center. We've been able to retenant the mall. In total, the entire property, the entire campus, generates over $1 billion of sales, and we're really, really excited to bring this next phase. But we're studying it, and it will hit the pipeline over the next few quarters.
Ronald Kamdem (Managing Director)
All right. That's it for me. Thank you.
Scott Kingsmore (Senior EVP, CFO and Treasurer)
Sure.
Operator (participant)
I show no further questions at this time. I would now like to turn the call back to Tom for closing remarks.
Tom O'Hern (CEO)
Thank you, Michelle. Thank all of you for joining us today. All kidding aside, I would like to say that it's been my pleasure to work with you, and I will miss all of you. As I approach retirement, I'm highly confident in the future of the company under the leadership of Jackson, our board of directors, and the balance of our incredibly talented leadership team here at Macerich. I wish you all the best.
Operator (participant)
This concludes today's conference call. Thank you for your participation. You may now disconnect. Have a great day.