The Macerich Company (MAC) Q4 2022 Earnings Call Transcript

The Macerich Company (NYSE:MAC) Q4 2022 Results Conference Call February 7, 2023 1:00 PM ET

Company Participants

Samantha Greening – Director, IR

Tom O’Hern – CEO

Scott Kingsmore – Senior EVP, CFO

Doug Healey – Senior EVP, Leasing

Conference Call Participants

Derek Jonathan – Deutsche Bank

Alexander Goldfarb – Piper Sandler

Craig Mailman – Citi

Craig Schmidt – Bank of America

Floris Van Dijkum – Compass Point

Greg McGinniss – Scotiabank

Ki Bin Kim – Truist

Linda Tsai – Jefferies

Mike Mueller – JP Morgan

Todd Thomas – KeyBanc Capital Markets

Ronald Kamden – Morgan Stanley

Samir Khanal – Evercore ISI

Operator

Greetings. Welcome to the Macerich Company Fourth Quarter 2022 Earnings Call. [Operator Instructions]

I will now turn the conference over to your host, Samantha Greening. You may begin.

Samantha Greening

Thank you for joining us on our fourth quarter 2022 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.

Actual results may differ materially due to a variety of risks and uncertainties set forth in today’s press release and our SEC filings, including the adverse impact of the novel coronavirus on the U.S., regional and global economies and the financial condition and results of operations of the Company and its tenants.

Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included in the earnings release and supplemental filed on Form 8-K with the SEC, which are posted in the Investors section of the company’s web site at Macerich.com.

Joining us today are Tom O’Hern, Chief Executive Officer; Scott Kingsmore, Senior Executive Vice President and Chief Financial Officer; and Doug Healey, Senior Executive Vice President of Leasing.

And with that, I would like to turn the call over to Tom.

Tom O’Hern

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 3 quarters of ’22, we had a very strong fourth quarter. We saw robust retailer demand. And although tenant sales were flat in the fourth quarter versus a very strong fourth quarter of ’21, 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 fourth quarter highlights include occupancy, which ended the year at 92.6%. That was a 110 basis point improvement from the fourth quarter of ’21 and a 50 basis point sequential quarter improvement over the third quarter of ’22. We continue to see strong leasing volumes, which for the year, were in excess of ’21 levels. For the quarter, we executed 261 leases for 900,000 square feet. Doug will be providing more detail on that in a few moments.

We saw same-center NOI growth of 2% in the fourth quarter compared to the fourth quarter of ’21, 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 3% — $0.03 ahead of consensus. On January 27, we declared a dividend of $0.17 per share, payable March 3 to record holders as of February 17, ’23.

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 square foot 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 square feet of Class A office. This is in addition to the re-merchandising of the Nordstorm wing with luxury brands and dining, which is well underway. At our flagship Tysons Corner Center, we’re building upon the highly successful Phase 1 mixed-use development that brought Tysons Tower, Vita and the Hyatt Regency to the center. We are using a portion of our 2.4 million square feet of available entitlements to plan for another mixed-use project. Also 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 square feet of space on the third level of the property in the in the former ArcLight theater space.

Arte expects to attract 1 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 Lifetime 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 multifamily projects at Kierland, FlatIron, Tysons. Interest continues at levels we’ve never seen before. Bankruptcies continue to be at a record low, and we continue to expect gains in occupancy and net operating income as we progress through ’23.

And 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 ’23.

Scott Kingsmore

Thank you, Tom. Now on to the highlights of the quarterly financial results. This morning, we posted solid operating results for the fourth quarter. Same-center NOI increased 2% versus the fourth quarter 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 fourth quarter 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 — 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 rent from the Google lease at One Westside as well as from straight-line receivable write-offs during the fourth quarter of 2021 as we then finalized our remaining pandemic tenant-related receivables last year. Secondly, a $4 million increase from same-center NOI. And third, a $4 million relative improvement in valuation adjustments pertaining to our retailer investments, net of taxes.

Offsetting these 3 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; and 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 to $1.85 per share. Here are some details underlying the guidance. This FFO range includes an estimated same-center NOI growth range of 2% to 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 first and second quarters, 25% in the third quarter, and the remainder in the fourth quarter of 29%.

Primary factors to reconcile between our 2022 actual FFO that we’ve just reported and this 2023 estimated FFO were 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; and then lastly, approximately a $0.02 decline in noncash 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 financial information specifically on Page 15 that was filed earlier this morning.

Now on to the balance sheet. We continue to make good progress in our financing pipeline. In early December, we closed a 3-year extension of our $300 million CMBS loan on Santa Monica Place. The loan extended — the extended loan carries a very attractive floating rate of LIBOR plus 1.48%, which is converted to SOFR probably in the next 2 to 3 months. The loan now matures on December 9, 2025, including extension options.

On January 3, as we turn the page on the calendar year, we closed a $370 million 5-year refinance of the previous $363 million of combined loans that formally encumbered the Green Acres Commons, both on the mall and the power center, both of which were scheduled to mature in the first quarter 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 6, 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 5-year loan is expected to be a fixed rate that will — the loan balance will be $700 million, and that is expected to generate roughly $150 million of incremental liquidity to the company. The 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 2.7x. Net debt to forward EBITDA, excluding leasing costs, at the end of the quarter was 8.8x.

Now I’ll turn it over to Doug to discuss the leasing and operating environment.

Doug Healey

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.

Fourth quarter sales were basically flat versus fourth quarter 2021. But for the full year 2022, sales were up almost 3% when compared to the same period in 2021. And 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 31, 2022, were $869, down just a little from our record $877 at the end of the third quarter. Trailing 12 leasing — trailing 12-month leasing spreads remained positive at 4% as of December 31, 2022. That’s down from 6.6% last quarter, and essentially flat when compared to December 31, 2021.

In the fourth quarter, we opened 226,000 square feet of new stores. For the full year 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 fourth quarter, including Anthropologie at Biltmore Fashion Park, Aritzia and Timberland at Fashion Outlets of Chicago, Free People at The Oaks, Freebird at Kierland Commons, Lululemon at San Tan Village, North Face at Washington Square and 3 stores with JD Sports at Country Club Plaza, Scottsdale Fashion Square and Victor Valley.

In the luxury corridor — 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 Corte Madera.

Now let’s look at the new and renewal leases we signed in the first quarter — fourth quarter. In the fourth quarter, we signed 261 leases for just over 900,000 square feet. For the full year 2022, we signed 974 leases for 3.8 million square feet. And 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 fourth quarter was, in large part, addressing our lease expirations, finalizing 2022 and getting a head start in 2023. In doing so, in the fourth quarter, we signed over 200 renewal leases with almost 100 different brands totaling 640,000 square feet. 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. And 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 square feet. Examples include Arte Museum, as Tom mentioned, Hermes, 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 fourth quarter, we had 140 leases signed for just over 2 million square feet 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 0.5 million square feet, which will also open in ’23, ’24 and early 2025.

So in total, that’s over 2.5 million square feet of new store openings throughout the remainder of this year and beyond. And I want to 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 $62 million of incremental rent. And this represents approximately 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 2022. Sales in 2022 outpaced 2021 by nearly 3%, and 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 only 7 quarters since our trough at the end of first quarter 2021, and we expect this trend to continue throughout 2023.

Leasing spreads remain positive and will also continue to improve as we increase occupancy.

There are no bankruptcies in our portfolio in the fourth quarter and only 3 for all of 2022. And bankruptcies overall are at their lowest level since 2015, which is consistent with our significantly reduced tenant watch list.

Leasing volumes were at record level 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 ’24 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. And I think this is the result of the very healthy retail environment that exists today as well as a testament to our best-in-class portfolio of super regional town centers.

And now I’ll turn it over to the operator to open up the call for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Derek Jonathan with Deutsche Bank.

Derek Jonathan

Thanks for the puts and takes in guidance, Scott. I was wondering, what bad debt assumptions did you forecast in guidance given the macro backdrop? And any background assumptions on retention ratios or insights or further insights into the $10 million in lease termination income would be helpful.

Scott Kingsmore

Thanks, Derek. Bad debts, we expect to be very normal, not significant at all. And that’s consistent with what we’re seeing. Again, Doug mentioned our tenant watch list is very low, incidents of bankruptcies are low. So we don’t expect a significant amount of bad debts. And 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. They’re just — there’s a lot less volatility. Those numbers obviously escalate during times of volatility. So we expect that environment to be much more normal.

Derek Jonathan

And then the retention ratio to the last part of that question?

Scott Kingsmore

Yes. Thanks, Derek, for the memory jog. We have, for the last several months, last several quarters, frankly, experienced very strong retention rates. 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. But generally, we’re seeing very strong retention rates as we talk to retailers about renewing their fleet.

Derek Jonathan

Okay. And then let’s shift to leasing, right? I mean so clearly, the way it looks right now, according to you, the deal pipeline is shaping up pretty strongly. But are you seeing any shifts given the macro uncertainty? I mean clearly, ’21 and ’22 were solid leasing years. But I guess the question is, are retailers still pushing through with expansion projects in your view? How are leasing and rent negotiations progressing or changing early in ’23? And I guess, lastly, like you’ve been through downturns before. Are you seeing any leading slowdown indicators at this point? Any further leasing info certainly is valuable.

Tom O’Hern

Derek, I’ll start and then 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 in Santa Monica Place, and there’s 2 or 3 that are going to follow that are not subject to mentioning the retailer’s name yet, but you’ll be seeing announcements within the next few weeks. So if anything, we’re seeing a heightened sense of urgency to get deals done and documented, and not a lot of pressure on rate, at least on the bigger, higher profile deals. Doug, you might care to speak more of the in-line spaces.

Doug Healey

Yes. Derek, I mean 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 pull back. 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 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. So 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.

Operator

Our next question comes from the line of Greg McGinniss with Scotiabank.

Greg McGinniss

I apologize. I was on mute. Rookie mistake. I apologize if I missed any opening remarks, but what’s the land sales expectation built into 2023?

Scott Kingsmore

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 would say that will land somewhere between 40% to 50% or so of ’22 levels.

Greg McGinniss

Okay. Great. Back to that leasing on that, you got a pretty sizable pipeline that’s expected to open up over the next few years here. I believe you said 2.5 million square feet, if I’m not mistaken. What’s the net increase in NOI that’s expected to benefit from that? And is that occupancy already reflected in that 92.9% just to check?

Tom O’Hern

Greg, the occupancy does reflect that pipeline. So it’s included in the 92.6%. The pipeline of square footage is 2 million square feet, although Doug is rapidly trying to add to that. And it’s a top priority for us to get that space signed. We’ve got to get it open because really the high 5s come when the tenants start paying rent.

And 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 inflationary times, and we’re fighting some rising operating costs, but the vast majority of it will. So I’d estimate we can see north of $55 million of NOI pickup as a result of getting those pipeline deals open and paying rent.

Greg McGinniss

Okay. So that was a net number. Thank you.

Operator

Our next question comes from the line of Craig Schmidt with Bank of America.

Craig Schmidt

One, I was just wondering, are you still getting signs from the consumer that they want more restaurants at your property? And how has the success rate then of the restaurants that you have opened in the last couple of years?

Doug Healey

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. So 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. So to answer your question, yes, we’re seeing it in the demands there.

Craig Schmidt

Great. And then maybe you can tell me a little bit about Arte Museum at Santa Monica Place? The visitors seemed very impressed, but what exactly would you be seeing at the museum?

Tom O’Hern

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, a wave crashing over you, for example. And you can go to their website. They’re open in Korea. I think they’ve got one other U.S. location, maybe in Las Vegas. But they certainly generate a lot of interest, a lot of traffic, a lot of visits. And we think it’s going to be very beneficial for the third level of Santa Monica Place, and we’re hoping the concept can — can travel a little bit through the rest of our portfolio. But it’s exciting. There’s nothing really like it around, and it’s going to be a tremendous addition.

Operator

Our next question comes from the line of Samir Khanal with Evercore ISI.

Samir Khanal

Scott or Tom, how are you thinking about variable rent or percentage rent this year with the conversion to fixed rent? And I guess 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?

Scott Kingsmore

Yes, Samir, we expect percentage rents to continue to decline as we renew leases and convert those variable rents to gross rent — or excuse me, to fixed rents. That’s a concerted effort on our part. We saw some of that in 2022, and I think you’ll see that accelerate in ’23. We’ve — just by frame of reference, we’ve budgeted our sales to be neutral in 2023. So we’ll see how the rest of the year pans out in that regard. But we’ll certainly see variable rents continue to convert over to fixed rents. And then Samir, I’m sorry, second part?

Samir Khanal

Go ahead. Sorry.

Scott Kingsmore

And the second part of your question was?

Samir Khanal

No. With international tourism coming back, I mean, from China or other areas, is there a potential upside to that number, you think? I mean how — are you baking in any sort of upside to percentage rents coming from international tourism coming back here potentially?

Scott Kingsmore

No, we’re not getting that specific. But 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, we’ll certainly see some benefit, obviously, some benefit in markets like Santa Monica, in Chicago and Tysons Corner. So we’re not building that into the guidance, but 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

And any color you can provide on sort of what your assumptions are for occupancy for ’23? How much of an occupancy pick up will we see, you think?

Tom O’Hern

We’re going to continue to push that. Obviously, the higher the occupancy gets, the tougher it is to get there. But we were about 94% pre-COVID, dropped as low as 88%. And we’ve leased our way back to 92.6%. And we’ll be — our expectation is to be somewhere between 93.5% and 94% by the end of next year.

Operator

Our next question comes from the line of Floris Van Dijkum with Compass Point.

Floris Van Dijkum

I had a question. Where you think — at what point do you expect you’re going to recover ’19 levels of NOI in your portfolio? And obviously, your portfolio has changed a little bit over the last couple of years. You made a couple more asset sales, et cetera. But 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? And obviously, clearly, your guidance assumes a slowdown in your NOI growth from the 7% plus levels that you’ve achieved over the last 2 years. So maybe you can give some comments on that as well, when you get a chance.

Tom O’Hern

Yes. Well, the same center growth, I mean that’s coming against some very tough comps. 7% growth for 2 years in a row, that’s extraordinary. So that’s a little bit out of the norm, and this year, we’re getting back to a more normal level. But in terms of when we get back to pre-COVID NOI levels, we’ve said for some time, we believe it’s going to be around the fourth quarter of ’23 and going forward from there. And it will track, to some extent, with the occupancy level as we get closer to that 94%, which we’re pushing for this year. So we think we’ll be there in the fourth quarter, and that’s not inconsistent with what we’ve said in 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

And maybe if you can — 1 comment and maybe on — or if I can get your comments on your recovery ratios. One of the things that, obviously, you’re part of what’s going to 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 — which could drag your NOI growth, which benefits from your 3% bumps in your occupancy gains and hopefully some positive lease spreads as well. But if maybe you can give a little bit more comments 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 and presumably moving from turnover-based rents and tenancies to permanent tenancies should hopefully improve your recovery ratios and your margins as well going forward.

Scott Kingsmore

Yes, 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 ranging between 4% to 5%. So if I were to say, ’22 and ’23 inflation has resulted in an abnormal increase in our shopping center expenses, perhaps that slightly outpaced the annual bumps that we’re getting in fixed CAM.

But bear in mind, year after year, leading up to this hyperinflationary environment that we’re currently experiencing, we’ve been clipping along with annual increases that well surpassed inflation. So I think we’ve had plenty of, call it, “bank” 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 — we are getting those fixed bumps in our deals with very rare exception. And we’re certainly going to 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.

Operator

Our next question comes from the line of Alexander Goldfarb with Piper Sandler.

Alexander Goldfarb

So 2 questions. First up, Tom, on the sales, obviously, we know stuff can be — you always get a mix in sales. But curious, in the fourth quarter, sales were down relative to third quarter. Is this mix? Is it inflation like our — I understand, obviously, tenants are strong, they’re leasing. We firmly understand that. But 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 fourth quarter, people splurge and go out with a bang for the holidays and then maybe pull back once they get the credit card in the first quarter.

Tom O’Hern

Yes, Alex, the comparison was versus the fourth quarter of ’21. And sales in the fourth quarter of ’22 were flat with the first quarter of ’21. But ’21 was a very strong quarter, fourth quarter of ’21. And so that’s not necessarily bad news or an indication that consumers pulling back. I think it’s just we were going against a tough comp. A lot of the retailers blame weather issues. I’m not going to go there. But we weren’t uncomfortable with that result. We were up 3% for the year. And in terms of traffic and activity, the consumer is still there and proving to be very resilient. So we weren’t necessarily concerned about what happened with sales and traffic in the fourth quarter. It was just going against a very tough fourth quarter of ’21.

Alexander Goldfarb

Yes. I was comparing it to third quarter trailing 12 to third quarter versus trailing 12 to fourth quarter, 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 ’21 and ’22, 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. But it would seem like you guys would still have a lot of bumps in the tank, if you will, on occupancy rebuild that would get maybe better NOI growth. So 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

You’re right about that. I mean we announced the deals, the day we sign them, they go into occupancy. But in some cases, if you look at something like a Pinstripes or a Lifetime Fitness, it’s going to take close to a year to get it built out, and it doesn’t start hitting NOI until the build-out. So a lot of the stuff that we’re talking about today, like Arte Museum, we’re going to get the benefit of that in ’24 and ’25 as it relates to NOI growth, but not in ’23. So that big pipeline does bode well for the NOI growth as we look forward into ’24 and ’25.

Operator

Our next question comes from the line of Linda Tsai with Jefferies.

Linda Tsai

Sorry if I missed it, but did you outline bad debt expectations for ’23?

Scott Kingsmore

Yes. 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 nearly $800 million of NOI.

Linda Tsai

And 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

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 2, 3, 4 years. But then 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 retailer. They have as much business in their bricks and mortar than they do online. So the new ones are slowing, but the ones that are emerging are really picking up.

Linda Tsai

Just one last one. Are the luxury retailers turning their store opening plans back to Asia given the reopening? Or what are you seeing as it relates to domestic demand from the luxury retailers?

Tom O’Hern

Where that’s most relevant for us, Linda, is at Scottsdale Fashion Square. We had such great success to 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. And the demand has been very, very strong. So not a big sample size to speak to your question, but where we are looking to put in luxury brands, we’re having pretty strong demand. I don’t see it pulling back at all. Do you, Doug?

Doug Healey

No, not at all. It’s only going to get better.

Operator

Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets.

Todd Thomas

Just a question about the same-store NOI growth forecast of 2% to 3%. As occupancy is expected to increase, which you indicated, and it appears rent growth is holding steady here, obviously, a lot of other factors, including the expenses and recovery income that you discussed, but can you just provide a little bit more detail around that build up to the 2% to 3%? And sort of, I guess, my question is, what’s kind of holding it back a little bit? You talked about the $62 million of incremental rent or I suppose, $55 million of NOI that is expected to come online. That’s pretty significant growth off your current base. So I’m just curious if you could talk about that a little bit and a little bit more detail around the 2% to 3%.

Scott Kingsmore

Sure, Todd. This is Scott. The biggest factor, I think we touched on it earlier, is downtime. As you take large space off the market, most of which is committed, some of which is not, you’ve got downtime, which impacts you. And 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 where we’re taking offline. So that downtime certainly cuts against growth. You touched on the other component, obviously.

Tom O’Hern

It temporarily cuts against growth. It ultimately — so we talked about the $55 million of incremental pipeline. That doesn’t all hit in ’23. Significant percentage of that hits in ’24 and maybe some of it even in ’25. So 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

And 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. But you can take a look and see what the incremental pipeline is by year.

Todd Thomas

Okay. That’s helpful. And how much of the $62 million or that leasing pipeline, how much of that is in the same store?

Scott Kingsmore

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

Okay. And just last question. On the occupancy specifically, you’re looking to sort of be in that 93.5% to 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 will be similar to ’22 or more of a historical sort of average if we think about that occupancy trend throughout the year?

Scott Kingsmore

Yes. We’re really going to see occupancy — physical occupancy tick up by the time you 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. So 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

What about seasonally moving from 4Q ’22 into early ’23, right, 4Q to 1Q, sort of 1Q to 2Q, are you expecting any seasonal occupancy loss? Or do you expect this to be another year where there’s just very little muted sort of levels of occupancy loss early in the year?

Scott Kingsmore

You’ll always see a drop after the fourth quarter. January is typically when leases roll, you’ve obviously got the temporary tenancies, which are seasonal in nature, and those guys may roll off. So you’ll always see a little bit of a tick down from the fourth quarter to the first quarter. 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

Yes. Historically, if you go back over the last 15 or 20 years, it’s been a range of 20 basis points to 60 basis points decline between the fourth quarter and end of the first quarter. And I would expect that it would be very similar this year.

Scott Kingsmore

Yes. If I recall, Tom, last year, it was about 40 to 50.

Tom O’Hern

Yes. correct.

Operator

Our next question comes from the line of Mike Mueller with JP Morgan.

Mike Mueller

Scott, what is the actual retailer valuation income assumption in the ’23 forecast? I think you said it was about $0.05 higher year-over-year, but what’s the number?

Scott Kingsmore

It’s about $0.01 in aggregate, very small. Very hard to predict also where these market valuations are going to be, but it’s nominal in 2023 to be conservative.

Mike Mueller

Got it. Okay. And then on some of the densification opportunities that you talked about, can you just run through some rough time lines?

Tom O’Hern

It’s — those are really going to run — some happened — the ones I mentioned relating to multifamily, it takes a little while to get the entitlement perfected and move forward. Those are going to mostly hit in ’24 and ’25. As it relates to the retail projects such as Scheels Sporting Goods and Arte Museum, those will be open late ’23 or into ’24. So it is a variety. We expect to spend about $150 million, Mike, in ’23. And I would expect to like them out ’24 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 ’25 opening, ’24, ’25.

Operator

Our next question comes from the line of Ki Bin Kim with Truist.

Ki Bin Kim

Can you just talk about the trends in operating costs that we should expect in ’23? And as these costs go up and as you pose higher lease spreads, I’m curious, how much of those higher lease spreads actually can translate into the bottom line versus maybe anticipated into a higher cost?

Scott Kingsmore

Yes, our operating expenses will continue to tick up. Ki Bin, we expect about a 3% to 4% growth in shopping center expenses. It’s a range of outcomes, from labor costs to property taxes, big line item, insurance, big line items. So we’ll see that. Leasing spreads are kind of independent, right? You manage your expenses on a fixed CAM world. And the spreads, your ability to generate pricing power is really driven by growth in occupancy and creating that tension between supply and demand. And we think we’re there. We’ve started to see spreads over the last couple of 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

Yes. No, I agree. And 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, going to drive rate up. So you combine competition with increased occupancy, we’re starting to see it in terms of driving rate.

Ki Bin Kim

And when you negotiate with tenants, how often is the topic of crime and safety being elevated when you discuss leasing with tenants? And can you talk about some of the things that you’ve done as a landlord, maybe in conjunction with the study to make a safer kind of shopping environment?

Tom O’Hern

Yes, I’ll take the second half of that. We work with all of our cities pretty closely. Santa Monica, for example, we spent a lot of time with the 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 1 area that we don’t scrimp on as it relates to expenses is security. And we use one of the biggest firms in the country, if not the world, to handle our security, and 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. And that’s 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.

Doug Healey

Yes. So we don’t really negotiate security when we’re negotiating leases. But 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. So there’s meetings, there’s functions, there’s conventions, if you will, that marry up our security and the retailer security. So we’re starting to see a pretty dynamic partnership there. But it’s not really a function of the lease.

Operator

Our next question comes from the line of Craig Mailman with Citi.

Craig Mailman

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 in guidance around timing of some of that stuff that you’re saying could be hit end of ’23, early ’24? Is there any chance of that hitting earlier on?

Scott Kingsmore

Yes, Craig, Tom touched on it, probably the most sensitive are the larger spaces that generate a significant amount of rent. And just as a practical matter, those take a fair amount of time to get permitted, get built out and ultimately start paying rent. We look at this space by space, and we coordinate with the tenant’s construction department to determine what those estimated rent start dates are. So 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 the space that came back to us during the pandemic. It’s an exciting space. We really want to get it open as soon as possible. But each circumstance is different. Each municipality you’re dealing with is different. So it’s very space-by-space specific. And I think we’ve got a pretty realistic perspective when we think that rent is going to start to come online.

Craig Mailman

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?

Doug Healey

I think — it’s Doug. I think it is easing up. I mean we’re talking to the retailers all the time, and that was a real issue last 12 to 24 months, but it’s really quieted down.

Craig Mailman

Okay. And then just one last one on.

Doug Healey

That and the supply chain issues that were often discussed in the last 24 months.

Craig Mailman

Great. And 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 positive or negative on that front to report?

Scott Kingsmore

Yes, Craig. During Investor Day, at that point in time, the market was pretty locked up. As we’ve started ’22 — or excuse me, 23, there’s certainly a fresh allocation of capital. So bond investors are 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 will take a little while for things to start to get back to normal. All that said, we’ve seen a pretty significant rally in credit spreads over the last, say, 4 to 5 months versus the fall.

You’ve obviously seen benchmark rates, 10-year treasury, 5-year treasury, bounce all over the place, including over the last couple of days with the recent employment report. But 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 1 refinance complete. We’ve got 1 finance expected within the next few weeks. And 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.

Operator

What do you think is a good placeholder for timing and rate on that loan?

Scott Kingsmore

On the Scottsdale loan? We’ll close — that will close in the first quarter. And if I were to guesstimate rate, it’s probably going to be in the low to mid-5% range.

Operator

Our next question comes from the line of Ronald Kamden with Morgan Stanley.

Ronald Kamden

A couple of quick ones. Just going back to some of the targets on levers at the Investor Day at the end of ’23. Just trying to tie those comments with sort of the sources and uses. You talked about sort of $315 million and operating cash flow. You take the dividend out, that gets you to $160 million. 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

Yes. We — if you look at that chart that we talked about on our 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, 8x over the course of the next year or 2. So those are the primary factors. We think that we’re certainly headed down the right path of achieving reasonable NOI and EBITDA growth between now and next year.

Ronald Kamden

Got it. And then going back to sort of the refinancing question, just on Washington Square, some of the paydown for that loan, only $15 million. But just curious for commentary, both generally in terms of what the servicers are asking for? And more specifically on Danbury Fair or Fashion Outlets of Niagara, if there’s any updates there?

Scott Kingsmore

Yes, sure. Every case is specific. 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 of other names, hopefully, to be announced in the near future. If you were to look, Craig Realty, at taking that asset to market, the outcome would have been dramatically different. So an extension was very efficient for us. It resulted in no repayment of the loan proceeds. Again, that’s 1 isolated example. But generally, the extensions have been very efficient from both a liquidity standpoint as well as a rate standpoint. Frankly, 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 falloff of those rates shortly thereafter. So if you think about extensions for 3 to 4 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

So 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. And if you combine those, you end up with a 3- to 5-year term seems to work best for us, and that’s the strategy we’ve pursued.

Scott Kingsmore

And then if you look forward, 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. We’ll 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. And we attempted to finance Danbury Fair last year. The markets closed up on a couple of 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 right direction from an occupancy and absorption standpoint. So I think that’s a financing we’ll be able to get accomplished here within probably the next couple of quarters.

Operator

And 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

Thank you for joining us today. Again, we’re pleased to report a strong conclusion of 2022, and we look forward to reporting to you over the coming year as 2023 unfolds.

Operator

And this concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.