The Macerich Company
Q1 2021 Earnings Call Transcript

Published: 11 May 2021

[Operator:]

Good day, and welcome to The Macerich Company First Quarter 2021 Earnings Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Ms. Jean Wood, Vice President of Investor Relations. Please go ahead.

[Jean Wood:]

Thank you for joining us on our first quarter 2021 earnings call. During the course of this call, we will 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.

[Tom O’Hern:]

Thank you, Jean. And thank all of you for joining us today as we are finally finding ourselves on the back side of the pandemic and we see our business starting to return to normal. The COVID daily infection rates are down and dropping sharply through most of our markets. We now have three vaccines in distribution, and currently 46% of the U.S. population has had at least one dose. We’ve seen dramatic improvement in the past 90 days in terms of the country reopening and consumers getting back to normal. We find a lot of reasons to be optimistic. We continue to do our part as we have nine vaccination clinics at our properties and we’re administering a total of approximately 10,000 vaccinations per day. In terms of our core business, we’re at an inflection point. As we indicated last quarter, we expected occupancy to hit its lowest level in the first quarter. And in fact, it did at 88%, which is slightly lower than the low point coming out of the financial crisis in 2009. Post-GFC, by mid-2011, we were back to 92% occupancy, the absorption of space happened fairly quickly. We expect to see a similar recovery post-COVID, perhaps better, as today we have a much higher quality portfolio than we did 10 years ago. Although some of our first quarter operating metrics reflected the ill effects of final retroactive COVID-related rent abatements, the prospects going forward are extremely positive, and we expect to see a very strong recovery over the balance of the year and going into 2022. The leasing environment has significantly improved. Leasing volumes were very good in the first quarter, on par with the first quarter of 2020 when leasing was largely unimpacted by COVID. The demand we are seeing is not only from traditional retailers, but also nontraditional uses, such as fitness, health and wellness, co-working, medical, hotel, big box, food, beverage and entertainment.

[Scott Kingsmore:]

Thank you, Tom. Highlights of the financial results for the quarter are as follows. Funds from operations for the first quarter of 2021 was $0.45 per share and down from the first quarter of 2020 at $0.81 per share. This is in line with our expectations, since this is the lap quarter -- the final lap quarter or the final quarter of COVID-19 on a trailing 12-month basis, given the portfolio closing in March of 2020 at the onset of COVID. As we had previously communicated, retroactive rental abatements relating to 2020 rental income were expected to weigh down our first half ‘21 earnings, and in particular, our first quarter results. In the first quarter ‘21, we incurred $29 million of COVID-related rent abatements. As a reminder, we are not able to record these rent abatements until the related lease amendments are signed. While we do expect some further retroactive rent abatements relating to 2020 to fall within the second quarter, we do expect those to be significantly less than the $29 million we recognized in the first quarter of ‘21. Same-center net operating income for the quarter was down 29%. Retroactive rent abatements relating to 2020 rental income accounted for roughly half of this decline. And absent those abatements, same-center NOI would have declined by 15%. This morning, we affirmed the previously issued 2021 guidance for funds from operations and we direct you to the Company’s Form 8-K supplemental financial information for more details of the Company’s guidance assumptions. 2021 funds from operations is estimated in the range of $1.77 to $1.97 per share. While certain guidance assumptions are provided within our supplemental filing, here are some further anecdotes. This guidance range assumes no further government-mandated shutdowns of our retail properties. Guidance factors in the issuance of common equity to date, which I will elaborate on in a few moments. We are still not providing the same-center NOI guidance. We do expect to provide more color and details on guidance as the year progresses. That said, consistent with our expectation from last quarter, and as I previously communicated, we do still anticipate strong double-digit growth in the second half of 2021.

[Doug Healey:]

Thanks, Scott. In the first quarter, we continued working with our retailers to secure rental payments and improve our collection rates. Looking at our top 200 rent paying national retailers, we now have commitments with 190. That’s up from 176 last quarter. But more importantly, excluding those tenants that have filed for bankruptcy and vacated our properties, we have yet to reach resolution with only 1% of our top 200, and that’s measured based on total rent that these top 200 pay. As a result, our collections continue to improve. As of today, collection rates increased to 97% in the fourth quarter of 2020 and 95% in the first quarter of 2021. The tremendous progress we’ve made here paves the way for us to soon bring this workout initiative to an end. The short list of retailers who still refuse to pay and those with whom we’ve not made deals will be dealt with as they would have been pre-COVID, which is through the normal collection process as well as with legal action. I’m very appreciative to all those within the Macerich organization who have been involved with this initiative. It was an enormous effort that involved virtually every department within our Company. But now, it’s time to get back to business and focus solely on what we do best, and that’s managing and leasing our great centers. March was a very strong month in terms of sales, with all categories, except for food and beverage showing positive comps. March sales were up 137% over March 2020 and up 9.2% over March 2019. Looking at the quarter. First quarter 2021 sales were up 21% over first quarter 2020, and only down 2% when compared to the first quarter 2019. However, if you take out food and beverage out of the equation, given the government mandates this category faced, first quarter’s 2021 sales were up nearly 2% compared to first quarter 2019.

[Operator:]

We’ll go first to Craig Schmidt with Bank of America.

[Craig Schmidt:]

Thank you. I have a couple of questions. I understand June 15th, Governor Newsom is looking to fully open the economy. Is that a further pickup you’re going to see in sales? Are you already seeing the activity in your California that you don’t think that event would have much impact on your malls?

[Tom O’Hern:]

Craig, we think it’s going to have a significant impact. We’re still restricted in California as it relates to restaurant capacity and also food courts. So, a lot of the furniture has been removed out of the food courts. Restaurants are still operating at, depending on the county, 50% to 75% capacity. And we think it’s going to have a big impact. It’s going to have a big impact on traffic as well. Traffic is lagging sales a little bit. I’d say traffic is back to roughly 80% of pre-COVID where sales are approaching 100%, which means a couple of things, a higher capture rate. Those consumers are coming in focused in buying, but also it’s a function of us not having the food courts fully open and the restaurants fully open. That’s where you tend to get a lot of traffic and a lot of dwell time. So, we think it is going to be very much a positive event when the governor reduces the restrictions even further come mid-June.

[Craig Schmidt:]

Great. And then, a follow-up, just thinking about the new Primark. I’m wondering if the portfolio is going to shift to more value retailers once you start to fill up some of the vacancy that was brought on by COVID.

[Doug Healey:]

Hey Craig, it’s Doug. No, I don’t think so. I think, Primark may be value oriented, but Primark is an extremely big draw, and their popularity just continues to increase in the United States. I think, we’ll put value-oriented retail where we believe it needs to be within our markets and with our portfolio. But, I don’t think there’s any one indicator out there that leads anyone to believe that will become more value oriented.

[Operator:]

We’ll go next to Samir Khanal with Evercore ISI.

[Samir Khanal:]

Hey Tom, you certainly sound bullish on the leasing front. Just maybe you can expand a little bit on leasing spreads from a modeling perspective over the next sort of 12 to 18 months? How to think about that? I mean, you were down a little bit. Just trying to get a little bit more color on that.

[Tom O’Hern:]

Yes. Samir, it’s always a balancing act between filling space as well as pushing for rate. And I think, we’re going to see similar to what we saw coming out of the great financial crisis. There’s going to be a little pressure on rate in order for us to fill some of these extracurricular vacancy that we have, as a result of COVID. So, I think, we’re going to continue to see flat spreads probably for the next 1.5 years or 2 as we see the space being absorbed and get back to a more normal level of 91%, 92% occupancy.

[Samir Khanal:]

Got it. And then, just shifting over to Scott. Maybe you can remind us kind of where you stand from a leverage standpoint today, maybe debt-to-EBITDA and how you think about that ratio over the next sort of, let’s say, 24 to 36 months, as we kind of think about the recovery and the strong leasing activity you’re having?

[Scott Kingsmore:]

Yes. Sure, Samir. I’d say, we’re in the high-10s right now on a forward-looking basis. Again, net debt to EBITDA, so netting out our cash on balance sheet, as we look forward. And we did put out an investor deck that gave a three-year perspective, which what I believe were pretty conservative EBITDA growth assumptions. Coming out of the global financial crisis, we saw outsized earnings growth from occupancy absorption and just improvement in the overall economic environment. And I think we see a similar pattern developing here, in fact, maybe even at a greater trajectory and a greater pace of recovery than we did coming out of the global financial crisis, remains to be seen. But, I do think that we’ll continue to see debt-to-EBITDA improve organically through operating growth. And obviously, we made some progress year-to-date, paying down over $1 billion worth of debt.

[Tom O’Hern:]

Yes. Additionally, and it’s not factored into our guidance, but our goal is to continue to sell non-core assets. You saw that we sold Paradise Valley. That was an unleveraged asset and the proceeds were used to delever. And it’s hard to predict the exact timing, but there’s a number of other assets, many of which are unencumbered that we would be interested in selling if the right opportunity were available, in which case, in all likelihood, those proceeds would be used to delever as well, and accelerate that reduction of debt to EBITDA.

[Operator:]

We’ll go next to Mike Mueller with JP Morgan.

[Mike Mueller:]

In terms of the vacancy booked, can you talk a little bit about how much of them were tied to, say the Arizona portfolio that was largely opened versus California that was more restricted? And, were there significant geographical differences there?

[Scott Kingsmore:]

Yes. Good morning, Mike. I don’t have the exact breakdown, but I can tell you that given the fact -- and we’ve spoken to this before, given the fact that our California, New York properties were down probably on average five months during 2020 and really weren’t open until the beginning of the fourth quarter, the negotiations with those retailers were necessarily delayed. So, we didn’t really start working out with those tenants until the fourth quarter and some of that spill into the first quarter. So, I don’t have the specific geographic differences, but I can tell you, after approving these deals ad nauseam, there was more in California, New York than the balance of the portfolio.

[Tom O’Hern:]

It’s obviously tougher to get a retailer to come to terms on an agreement when their stores are closed. So yes, California and New York were definitely tougher sections of the country for us to get our deals done.

[Mike Mueller:]

Got it. And then, just one other question, sticking with the abatements. That $29 million in the quarter, I think you said it was mostly tied to transactions in 2020. Was there any significant 1Q component in there?

[Scott Kingsmore:]

No. The 98% of it pertain to 2020.

[Tom O’Hern:]

Retroactive adjustments related to 2020 rents.

[Operator:]

We’ll go next to Caitlin Burrows with Goldman Sachs.

[Caitlin Burrows:]

I was wondering, maybe first, on the percentage rents, it looks like they were up a lot in the first quarter, almost $7 million versus $2 million to $3 million in 1Q ‘20 and 1Q ‘19. So, I was wondering, is this a result of more leases now being on a percentage sales basis? And should we expect this to continue to be elevated going forward?

[Scott Kingsmore:]

It’s elevated partially because of that, Caitlin. We did have some, especially with some of the locals, some percentage deals that were very short term in nature. I don’t think that elevated level is something that you can count on for the next few years. It’s really just something that will kind of burn off as 2021 progresses. Of course, the sales environment has continued to improve. So, we’ve seen some pickup there. But, I think the impacts that you’re seeing there, quarter-over-quarter, are really just a short-term function -- short-term function of getting through some of these negotiations.

[Caitlin Burrows:]

Okay. And then, also, it looks like the -- that Macerich’s share of other income from unconsolidated JVs was $14 million in the first quarter versus like $2 million to $3 million in 1Q ‘20 and 4Q ‘20. So, just wondering if there was something specific that drove that increase?

[Tom O’Hern:]

Yes, sure. Recall that we do invest indirectly in retailers and certain real estate companies through a venture capital firm. It’s something we’ve been doing for years. Those investments actually are accreting both, realized and unrealized gains. So, that’s the lion’s share of what that is in the first quarter.

[Operator:]

We’ll go next to Katy McConnell with Citi.

[Katy McConnell:]

So, now that you’ve addressed the majority of your 2021 obligations, can you talk about your next priorities for capital allocation? And what needs to happen first in order for you to put it back to more offensive investment spending, including ramping up leasing CapEx to adjust vacancy?

[Tom O’Hern:]

Yes. Hey Kathleen, for our standpoint, we addressed the debt. We addressed the line of credit. We expect to throw off a significant amount of operating cash flow after the dividend, which we’re certainly for the right deals, very willing to use that as leasing capital. So, as we mentioned at the beginning of the call, we’ve got about $450 million of liquidity today. We expect that to increase. So, I don’t expect to be limited at all as it relates to our ability to spend CapEx for particularly lease-up of boxes and vacancies. Some of our other redevelopments that were put on hold during COVID will start-up again, and we’ll be going through the entitlement process on those. And that probably is more like 2022 to 2023 type capital activity. And again, as I mentioned, we will be selling noncore assets, which will be giving us additional liquidity to delever and/or reinvest in the development pipeline.

[Katy McConnell:]

Okay, great. And then, maybe on that point, could you just provide some context around trends you’re seeing in the transaction environment from all deals today as things start to stabilize? And do you have anything else on the market at this point?

[Tom O’Hern:]

Katy, a lot of the assets that we’re selling are noncore, and they’re not necessarily malls. We have not seen a lot of mall transactions to take place. In the case of Paradise Valley, that was a mall that was going to be repositioned to a variety of mixed use, mostly residential. And then, we’ve got a couple of other assets that we’re in discussions on, I wouldn’t say in the market per se, but in discussions on that are not conventional malls. And I think there’s a more diverse appetite for those than for a typical traditional regional mall today.

[Operator:]

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

[Floris Van Dijkum:]

I know it’s hard to -- in terms of -- I know you’re not giving same-store guidance, for example. But, maybe if you could -- I mean, you’ve lost almost $150 million of NOI from ‘19 levels. Maybe if you can talk about the path and the timing of getting back to that kind of profitability and occupancy as well. Maybe -- obviously, it’s not going to happen this year. You mentioned this is sort of a stabilizing year. Should we see a greater ramp in NOI growth next year and in ‘23, or maybe talk a little bit more about the future for what you see for Macerich?

[Tom O’Hern:]

Yes. Floris, I mentioned it a little bit in the beginning as it related to how we recovered post-GFC. And roughly the same occupancy level took roughly two years -- two years plus a little bit. And what we see here is, I think we’ve got a stronger leasing environment than we had then. And we have far more categories that are interested in mall space than we had then. So, I’ll let Scott speak to the NOI. But in terms of getting the occupancy level up, I would say, we think it’s going to happen pretty quickly. And I would say by the end of 2022, we should be getting very close to our prior occupancy levels. That’s going to be a little bit ahead of the NOI recovery, but I’ll let Scott speak to that.

[Scott Kingsmore:]

Good morning, Floris. Beyond just occupancy recovery and vacancy absorption, recall that we did have some very significant shocks in 2022 to NOI. We had over $50 million of incremental bad debts, which I would consider to be nonrecurring in nature. We had $55 million, $56 million of abatements, which we’ve seen some of that carry into the first quarter. But again, I view that as a COVID workout situation and nonrecurring in nature. And then, as I’ve spoken to, on many occasions are more transient revenues, which were heavily impacted once the center is closed, are seeing a nice bounce back. And I think by the time we get to next year, we’ll see some nice growth there. All of that put into the mix, I think you’ll see some -- we certainly see a return to more normalized levels of growth over the next couple of years, but I -- cautiously optimistic that with the leasing environment we see that there’ll be some better-than-average growth in ‘22 and ‘23, again, without giving any guidance. But those are some of the onetime factors and then some of the things that we’re seeing in terms of leasing that could really boost growth and propel us.

[Floris Van Dijkum:]

Maybe my follow-up is to -- in terms of the written-off rents, have you seen any recapture, or are you having discussions? And is there any potential of clawing some of that back later on this year?

[Scott Kingsmore:]

Yes. Floris, I think, our reserves are accurately stated. I don’t see a huge perspective in terms of reserves bouncing back that would imply that we’re over reserved. And I think we’re adequately reserved. We’ve assessed these in a very deep manner. And I feel comfortable with where we’re at in terms of what our assessments are of our remaining receivables.

[Operator:]

We’ll next to Greg McGinniss with Scotiabank.

[Greg McGinniss:]

Hey. I’m just thinking about the guidance. So, you affirmed the range that was updated with the initial ATM issuance, now including another $240 million of equity. Were there some offsetting items that helped to maintain the range where it is, or is that initial -- is that additional ATM issuance expected?

[Tom O’Hern:]

As we’ve mentioned, the environment is continuing to improve in various areas, we’ve spoken to already. So I think that factors in there in terms of some general offsetting of factors that should result in some NOI improvements versus what we had expected. I mentioned, in response to Caitlin’s question that some of our other income is a result of our indirect investments through venture capital firms has resulted in some increases to FFO. So, those are two of the primary factors. And, in times of heavy volatility, you also see termination fees that are typically higher than what you would expect. So, there may be a little bit of pickup there. You throw all that in the mix, and that’s why we’re comfortable affirming guidance again.

[Greg McGinniss:]

Great. And just to clarify one point, on those venture capital returns. So, that’s expected to be recurring, so that just kind of a higher line item in general now?

[Scott Kingsmore:]

We’d like to think they would be recurring, but I wouldn’t factor that into our guidance or your numbers going forward.

[Operator:]

We’ll go next to Rich Hill with Morgan Stanley.

[Rich Hill:]

You’ve done a really good job over the past couple of quarters using a variety of liquidity sources to fund yourself, tapping the equity market, renegotiating with your bank lenders. You’re absolutely right, the CMBS market is there for the right properties with the right borrowers. So, as you sort of think about all these levers that you can pull over the next months, quarters, years, how would you prioritize them? And I recognize that priorities change depending on market conditions. But if you can maybe just walk us through how you think about your sources of the capital right now. I think that would be helpful.

[Tom O’Hern:]

Yes, Rich. So, I probably mentioned it in a variety of different spots. But putting it together, we’ve raised enough equity to downsize our credit facility. It was $1.5 billion. But, the reality is we never really used more than $1 billion. We artificially pulled cash off the balance sheet when COVID hit mid-March. But, we would normally operate between $700 million and $1 billion. So, to downsize, made sense, we raised a little bit of equity to do that. We used some cash. It was on our balance sheet. And then, going forward, we expect, given the dividend level today, we’ve got about a 35% payout ratio that we’re going to generate a significant amount of cash from operations that can be used to delever, something we’ve done for years, the dispose of noncore assets. In fact, coming out of the GFC, we made the decision to sell our lower-performing malls, and we sold 25 malls and generated $1 billion plus of capital that we used to delever. And today, we think there’s the opportunity to sell some of our noncore stuff. You saw that happen with Paradise Valley. There’s a couple of other assets that are pretty good candidates that we’re in talks on, although it’s too early to tell or give any guidance on those. And I think, you’d most likely see us use that capital to delever as well. So, the plan is to continue deleveraging from a variety of different sources.

[Rich Hill:]

That’s helpful. Just one follow-up question. I actually think the market for selling malls has maybe been a little bit more vibrant. Vibrant is probably too strong of a word, but there’s actually been a lot of transaction activities in 2020 and 2021, by our account, maybe 21 malls in 2020 and last I checked, 11, 12, 13 so far in 2021. So, I definitely think there’s buyers out there. Can you just -- I know you don’t want to give a guide and rightfully so on those transactions you might be in early negotiations with. But, could you just maybe give us some insights into what you’re seeing in the transaction market? Because you’re one of the few people out there that is talking about selling properties?

[Tom O’Hern:]

Well, the two that we’re having discussions on our non-mall assets. So, it’s not going to be quite in the same vein. And look, there’s a lot of people out there chasing return today. And they see in retail the opportunity to get some pretty good returns. And those are the type of buyers. They’re not public companies we’re talking to, high net worth individuals and others that have an interest in taking advantage of a bit of a dislocation in retail today. And that’s most of what we’re seeing, Rich. We haven’t seen anybody actively pursuing our traditional mall assets.

[Operator:]

We’ll go next to Linda Tsai with Jefferies.

[Linda Tsai:]

On the credit facility, where you’re paying 275 over LIBOR, but you could get it to 225 over LIBOR if you reduce leverage. Any color on what level of leverage is required or any other terms to achieve the reduced spread?

[Scott Kingsmore:]

Yes. Linda, I don’t want to get into all the details in terms of those thresholds, but we have made a fair amount of progress, concurrent with the closing, repaying $1 billion of debt. And so, I -- as we look forward, we do think that we’ll be at that threshold point, we’ll cut -- be able to reduce the spread by 50 basis points. I think, it’s realistic to assume we could have that in place, perhaps by the fourth quarter.

[Linda Tsai:]

Thanks. And then, just one follow-up. How many assets remain unencumbered or don’t have an equity pledge that can be sold?

[Scott Kingsmore:]

So, the new facility has elements of security, whether mortgages or pledges on equity on certain assets. We do have flexibility to refinance those assets, to sell those assets. Have a substantial amount of flexibility there. So, I don’t envision that new structure within our credit facility, impeding our ability at all to continue on our program of disposing noncore assets or financing any assets that we think are worthwhile of financing.

[Operator:]

And at this time, I will turn the call back to the speakers for any additional closing remarks.

[Tom O’Hern:]

Thank you. Thank you, operator. Thanks, everyone, for joining us today. We look forward to seeing many of you at NAREIT early next month.

[Operator:]

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