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Text: regional and global economy, and the financial condition and results of operations of the company and its tenants.
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, Leasing.
We had releasing spreads of 5% and occupancy at nearly 91%.
At the end of the third quarter, most of our town centers were open with only our three closed centers in Los Angeles remaining closed by government mandate.
Those centers reopened in early October.
So as of today, all of our centers are open and our tenants are eagerly planning for a busy holiday season.
Most of the results were better than the second quarter, but we were obviously adversely impacted in the quarter due to COVID in general and specifically due to the protracted California and New York City closures.
I'm very appreciative of the entire Macerich team that did a tremendous job of getting our centers reopened safely in some cases for a second time.
Some of the self-health and safety measures we took went way beyond CDC recommendations that included significantly upgrading our air filtration systems to include hospital quality air filtration with [Inaudible] filters; engage the clinical head of Infectious Disease at UCLA Medical Center to review and advise us on our protocols and policies.
We hired a nationally renown engineering firm to advise us on advanced HVAC systems and protocols.
We implemented modified hours, increased cleaning and sanitizing protocols, CDC guidelines, and approved products that are baseline for our services.
In terms of rent collections, we are much better off in the third quarter compared to the second quarter.
During the third quarter, our average rent collections were 80%.
October is trending above 80%.
For most of the tenants not paying rent during the closure period, we would generally come to terms with them.
In general, we agreed to rent relief usually in the form of deferred rent for the closure months with repayment in 2021.
In many cases, in exchange for landlord-favorable amendments to leases.
There were some large reserves for uncollectible rents in the quarter, which Scott will comment on.
Cash flow continues to improve by the month as we move into the fourth quarter, and I expect that to continue.
As of today, we have significant liquidity and currently have approximately $675 million of cash on the balance sheet.
The tenant reactions to reopening has been good.
Our tenants, almost without exception, were eager to get reopened.
By October, for centers opened at least eight weeks, sales were up to 90% of pre-COVID levels.
The consumer is shopping with a purpose and there has been pent-up demand.
Our second quarter was more about getting centers opened and getting our tenants open safely and less about leasing.
The focus in the third quarter was collecting past due rents and started to shift back to leasing.
Looking at traffic, in general, it's running about 80% compared to a year ago.
Some of that has to do with capacity limits, particularly for restaurants and also for having no seating in the food court.
Sales, on the other hand, are running on average 90% of a year ago, which means there, I'd say, higher capture rate.
This year will be a different holiday season.
We believe it's going to start earlier.
Operating hours will be shorter.
There will be capacity limits.
With consumers not spending money on vacations and entertainment during COVID, most of our consumers in our markets have money to spend this holiday season.
Top categories are expected to be fitness and wellness, home furnishings, electronics and athletic leisure.
There will be [Inaudible] but with lots of social distancing.
We've got a number of questions about potential for property tax increases in California, although small in the political scheme of things.
There was a proposition in California that would have increased property taxes on commercial property.
It is known as Proposition 15.
That proposition would have removed the protection of Prop 13 from commercial properties in California.
For us, generally, we structure our leases to pass-through taxes to the tenant as a recoverable expense with a significant bottom line impact that the [Inaudible] shows Prop 15 passing.
As of today, it is trailing.
The yes votes stand at 48.7%, the no are at 51.3%.
So hopefully, that means no increase for commercial taxes in California.
Looking at the balance of 2020.
The pandemic has shown that good retail is not going away, especially in A quality centers.
Digitally native brands appreciate, more than ever, the profitability of their physical stores.
Big format retailers got active again in the third quarter, and you'll hear some of the specifics from Doug.
Although we are still in the midst of COVID, our centers are operating at 90% capacity, sales levels of 90% pre-COVID.
And even if you look at one of the more challenging categories, restaurants, in our portfolio, we have 247 restaurants and 94% of those are open today.
The second quarter was an extremely unique quarter and some of the second quarter challenges carried into the third quarter and may even carry partially into the fourth quarter.
But many metrics got better in the third quarter, specifically collections.
And the number of tenants opened and the progress we are making on leasing activity.
The impact on reserves for adoption accounts was less than 20 — second quarter of '20, but still much higher than normal.
We expect to gradually improve to a more normal level in the first quarter of '21.
Although there are still too many uncertainties to give guidance, we expect the fourth quarter of 2020 and the year 2021 to be much better than the second and third quarters of 2020.
Disruption from COVID-19 continued to severely impact 2020 results in the third quarter.
Funds from operations for the third quarter was $0.52 per share, down from the third quarter of 2019 at $0.88 per share.
Same-center net operating income for the quarter was down 29%, and year to date, it was down 17%.
Changes between the third quarter of 2020 versus the third quarter of 2019 were driven primarily by the following factors and the numbers I'm going to cover [Inaudible] for the company: One, $20 million — $21 million in bad debt allowance in the form of the $14 million of increased net debt expense versus the third quarter of 2019, coupled with $7 million of lease revenue reverse for tenants, that are accounted for on a cash basis per GAAP within the third quarter; two, over $20 million of short-term nonrecurring rental assistance; three, a $9 million decline in common area and ancillary revenue as well as percentage rents; four, a $4 million decline in parking income driven by protracted property closures and reduced parking utilization at our urban centers in New York City and Chicago primarily; five, interest expense increased $4 million due to a decline in capitalized interest; six, net operating income declined from the Hyatt Regency Hotel [Inaudible], it was about a $2 million decline; seven, a negative $0.03 per share dilutive impact from shares issued in the second quarter relating to our stock dividend issued in the second quarter.
These factors were all offset by increased lease termination income of $7 million and land sale gains totaling $11 million net impact.
Revenue declines from occupancy loss also contributed to declines in both net operating income and FFO for the third quarter.
As Tom mentioned, we are not providing updated 2020 earnings guidance given continued uncertainties.
We do anticipate continued volatility operating results in the fourth quarter.
While we're not providing guidance for 2021, as we mentioned last quarter, we still believe that 2020 will be a trough in the company's operating results including primarily to the following factors: The pandemic has effectively accelerated the financial troubles with numerous [Inaudible], resulting in a wave of bankruptcy filings that were funneled and due 2020.
We do not anticipate this volume to recur in 2021.
The majority of the filings have resulted in reorgs and not full fleet liquidations.
We do expect approximately a 3% cumulative drop in occupancy from lease rejections, approximately half of which is already embedded within the 90.8% reported occupancy [Inaudible] third quarter, and the balance of these stores will close within the fourth quarter.
Year to date, we have reported $57 million in additional bad debt reserves versus 2019, including $50 million of bad debt expenses and $7 million of lease revenue reversals for tenants accounted for on a cash basis.
Similar levels of reserves are certainly not anticipated going forward.
We've recorded well over $20 million in nonrecurring short-term rental assistance year to date and we expect those to continue into the fourth quarter of 2020.
And then lastly, we anticipate increases to transit revenue line item going forward into 2021, namely the percentage rent, temporary tenant income, parking garage revenue, advertising, sponsorship, vending and other ancillary property driven revenue.
We look forward to providing 2021 guidance on our typical cadence this time next quarter.
Given the continued improvement in rent collections of 80% in the third quarter and over 80% in October, liquidity continues to improve.
Cash on hand has increased from $573 million at June 30 to $630 million at September 30.
And as Tom noted, liquidity continues to improve to this day.
This improved liquidity is solely due to improved operating cash flow and is a testament to the herculean efforts by our people to both secure the right to open all of our properties and to negotiate thousands of agreements with our retailers.
With continued progress in these negotiations, which Doug will soon elaborate upon, we anticipate further improvement to operating cash flow throughout the year.
We are closing on a 10-year $95 million financing on Tysons Vita, the residential tower at Tysons Corner.
The loan will have a fixed rate of 3.3% and will include interest-only payment during the entire loan term.
This will provide approximately $47 million of liquidity to the company, and we expect the loan closing to occur within the next several weeks.
We secured a short-term extension on Danbury Fair through April 1, 2021.
The loan amount and interest rate remain unchanged following that extension.
We have agreed to terms with the loan servicer for a three-year extension on Fashion Outlets of Niagara, which will extend the loan maturity through October of 2023.
We expect the loan amount and interest rate also to be unchanged following that extension.
And then lastly, we continue to work with our lenders to secure loan extensions for the nonrecourse mortgages on each of FlatIron Crossing, Green Acres Mall and the power center adjacent to that Green Acres Commons, and we anticipate securing extended term within the coming weeks.
Like the second quarter, the majority of our efforts in the third quarter involved getting our retail partners open as quickly and as safely as possible once our centers were allowed to reopen.
To date, all of our properties are open, and I'm happy to report that 93% of the square footage that was opened pre-COVID is now open today.
As I discussed on our last call, it has been the case in the third quarter, much of our time and energy was spent working with those retailers that did not have the ability to pay rent while closed.
And we've made great progress.
In fact, as we look at our top 200 rent paying retailers, we've either received full rent payment or secured executed documents with 147 and are in LOI with another 23, all of which totals approximately 93% of the total rent these top 200 pay.
Consequently, collections continue to improve.
Third quarter saw an average collection rate of 80%, that's compared to 61% in the second quarter.
And as of today, as Tom mentioned, our collection rate for October stands at about 81%.
But the third quarter wasn't all about collection.
As our centers continue to open and as our retailers opened and were able to trade with some consistency, the leasing climate began to improve.
Retailers began executing leases that have been out since before COVID.
But most importantly, the retailers began committing to new deals again.
A true sign that for the first time in months, we're now looking forward rather than solely focusing on the past.
I'll expand on this in a moment, but first, let's take a look at some of the third-quarter metrics.
Portfolio-related sales for the third quarter were $718 per square foot, and that's computed to exclude the period of COVID closures for each tenant.
The $718 is down from $800 per square foot at the end of the third-quarter 2019.
For centers opened the entire month, sales in September were actually 92% of what they were a year ago, once we exclude Apple and Tesla.
Occupancy at the end of the third quarter was 90.8%.
That's down 50 basis points from last quarter and down 3% from a year ago.
This is primarily due to store closures for bankruptcies and from our local tenants that couldn't survive the pandemic.
Temporary occupancy was 5.7%, that's down 70 basis points from this time last year.
Trailing 12-month leasing spreads were 4.9%, that's down from 5.1% last quarter and down from 8.3% in Q3 2019.
Average rent for the portfolio was $62.29, down from $62.48 last quarter, but up 1.8% from $61.16 one year ago.
As I mentioned earlier, the leasing environment continues to improve.
In the third quarter, we signed 120 leases to 342,000 square feet.
This is over 3x the number of deals and square footage that was signed in the second quarter, and these stats do not include any COVID workouts.
Some leases signed in the third quarter of note include Gucci, Fashion Outlets of Chicago, Ducati Paris at Scottsdale Fashion Square; Kids Empire and State 48 Brewery at SanTan; Barbarie's Grill at Danbury Fair; Starbucks at Fashion District Philadelphia; Madison Reed at 29th Street; Polestar at The Village at Corte Madera; finally, Lucid Motors at Scottsdale Fashion Square and Tysons Corner.
Both Lucid and Polestar are new additions to the electronic car category and first to the Macerich portfolio.
As we head toward the end of the year, much of our focus is on our 2021 lease expiration and finalizing deals in order to secure as much expiring square footage in 2021 as possible.
At this point in time, by virtue of COVID workouts and through the normal course of leasing, we have commitments on 26% of our 2021 expiring square footage with another 67% in the LOI stage.
This brings our total leasing activity on 2021 expiring square footage to just over 90%.
Turning to openings in the third quarter.
We opened 44 new tenants and 276,000 square feet, resulting in total annual rent of $11.3 million.
This represents 65% of the openings we had at the same quarter last year, but with 15% more square footage and virtually the same total annual rent.
Given the conditions our industry has faced over the last several months, I think this speaks volumes to the strength of the leasing pipeline we had pre-pandemic.
Notable openings include adidas and Tory Burch at Fashion Outlets of Niagara Falls; Aerie at Vintage Faire; West Elm at La Encantada; and Golden Goose, Capital One Cafe and a new Levi's store at Scottsdale Fashion Square.
In the large-spread — in the large-format category, we opened Dick's Sporting Goods at Deptford Mall, in a portion of a former Sears store; Saratoga Hospital at Wilton Mall, also in a former Sears store; a new and spectacular looking restoration hardware gallery at The Village at Corte Madera.
And all of this was in the third quarter.
In October, we finished the repurposing of Sears at Deptford with the opening of Round One.
And also in October, we remained active with Dick's Sporting Goods, opening them at Vintage Faire in a portion of Sears, and at Danbury Fair in the former Forever 21 box.
The digitally made of and emerging brands continue to expand their omnichannel presence by opening stores.
And the third quarter was no exception.
We opened Amazon 4-Star and Indochino at Scottsdale; two Warby Parker stores at Scottsdale and 29th Street, along with Amazon Books and Tempur-Pedic at FlatIron Crossing.
And our pipeline remains strong.
At this point, we have signed leases with 190 retailers scheduled to open throughout the remainder of 2020 and into 2021.
This totals 1.7 million square feet for a total annual rent of $63 million.
And since the pandemic, only nine of these retailers with signed commitments have informed us that they won't be reopening — they won't be opening.
Total impact of this is only 60,000 square feet of the 1.7 million square feet and only $3 million of the $63 million in total rent.
Lastly, I want to address the issue of traffic.
There's been a ton of focus on traffic and the fact traffic is down compared with last year, and it is.
There's no arguing that.
However, I struggle with the notion that traffic seems to be perceived as the sole means to a retailer's success.
Why aren't we talking more about conversion or sales or the combination of both?
Despite less traffic, the Macerich portfolio is seeing tremendous success in the reopening of stores that were forced to close due to COVID, like Primark at Danbury, being the No.
1 store in its region since reopening; or like Bath & Body Works at Freehold, beating last year's sales three months in a row with capacity limited to 50%; or HomeGoods at Atlas Park, outperforming last year by 15% while also at 50% capacity; or Burlington, reopening at Kings Plaza and selling through inventory that took a month to replace; or Sephora at Broadway Plaza, is currently ranked as one of the top stores in the company by virtue of conversion rates that are 20% to 30% higher than last year; or Round One at Deptford and Valley River, operating at full capacity with hour-long waits at night and on weekend; luxury retailers at Scottsdale Fashion Square such as Gucci, Louis Vuitton and Golden Goose, all exceeding planned by 25% to 40%; or North Italia, a restaurant at La Encantada, back to pre-COVID sales even at 50% occupancy; and Tillys at Arrowhead, reported double-digit sales increases since reopening in May and is expecting their best holiday season ever at this location.
And the list goes on and on.
Unfortunately, these success stories are too often overshadowed by the overwhelming focus on the effect this pandemic has had on traffic in the short-term and pre-vaccine.
Make no mistake, traffic is important.
There's no denying that.
However, I do think it's time we stop thinking so one dimensionally and focus on other metrics in addition to simply traffic.
And when we do, I think we'll all find that we are in a much better place than many think.

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macerich q3 ffo per share $0.52 excluding items.
q3 ffo per share $0.52 excluding items.
mall portfolio occupancy, including closed centers, was 90.8% at september 30, 2020, compared to 91.3% at june 30, 2020.

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