Floris Van Dijkum: Great. Thanks. Can you hear me?
Tom O’Hern: We can hear you Floris. Loud and clear.
Floris Van Dijkum: Great. Tom, congrats on the retirement. Good luck in your next venture, whatever you wind up doing.
Tom O’Hern: Thank you, Floris. I remember you when you were 25 and fresh out of UVA, and we’re going to visit malls in Northern California.
Floris Van Dijkum: I remember that, that was — and by the way, that was one of my lowlights actually, as some of you might have heard — I don’t know I won’t share that on this call, but — but yes, I do remember that. That was a memorable time. I had, I guess, two questions for you. Number one, if you can — one of the issues, I guess, with the mall sector, and you’re not unique. I think some of your peers have had to grapple with this as well. But is the people don’t think there’s going to be much growth in the center. Can you maybe touch on — obviously, the underlying growth was very strong last year, you’re expecting a little bit of a slowdown this year, probably with some conservatism baked in, I would imagine.
But maybe talk a little bit about some of the key drivers for growth. Obviously, you touched upon the S&O pipeline. Maybe can you give a little bit more color on what percentage of that S&O pipeline, for example, is luxury tenants? I know there’s a big win coming online at Scottsdale. How much of a driver of growth is that potentially for you going forward?
Tom O’Hern: Well, I’ll let Doug talk about luxury in a second, Floris. But as for people saying they don’t see the growth in the mall sector, then they’re clearly ignoring the facts. All you have to do is look at record leasing volumes in ‘22 and ‘23 and then drill down a little deeper and look at the types of tenants that are coming in, replacing traditional retail. This isn’t apparel retail. This isn’t footwear. These are new uses, new and creative food and beverage like Pinstripes, Lifetime Fitness, for example, very actively coming in, and they can generate an additional 5,000 to the center. We just that one tenant alone, adding our 10 museum, they expect to have 1 million visitors per year coming to the top level of Santa Monica place.
So there are a lot of exciting new uses that, frankly, we didn’t have 10 years ago. So I think whoever said they didn’t see the growth driving to the mall business, the A-quality mall business was sadly mistaken because all these new uses are driving traffic, they’re driving sales, they’re driving productivity. They’re driving rent and they’re going to drive NOI.
Doug Healey: Floris, it’s Doug. With regard to your specific questions about luxury, as you know, a few years back, we finished the luxury wing at Scottsdale Fashion Square and the Neiman Marcus wing. And late last year, early this year, we’re now focusing on bringing luxury — global luxury to the Nordstrom Wing. I think a few calls ago, we announced Hermes, which is the bellwether tenant for that property, and we’ll be announcing more over the next several months. But to Tom’s point, I talked about the leasing pipeline all the time. And it’s 2.2 million square feet. It’s going to open over the next 2.5 years. Those are phenomenal numbers. But the thing that really excites me is the uses we’re going to be bringing.
So that just all new uses, new exciting uses, you think about Din Tai Fung and you think about Elephante, True Food Kitchen, Vuori, H&M, Primark, Dave and Buster’s, Kiln, Lifetime Fitness, Tom mentioned Pinstripes, Target, Level 99. I mean, that’s really the beauty of this pipeline, not just the metrics, but the depth and breadth of uses that we’re bringing to our town centers over the next 2, 2.5 years.
Floris Van Dijkum: Great. Maybe a follow-up with Scott. I know you mentioned that Niagara is going to get refinanced, and that might surprise some people myself included, who thought that might transition back. I know you probably can’t say a whole lot, but does this mean that you will be investing leasing capital in this asset on a going forward basis? And what do you think that can do to the operations for this property going forward as well?
Scott Kingsmore: Sure. Floris, you’re right. I can’t speak in too much detail because the transaction is still in process. We do expect to secure a multiyear extension of that. The asset still does generate some FFO. It certainly has its challenges given its market positioning with north of the border in Canada and the local market. There still is some opportunities for that asset, and we’ll continue to — continue to capitalize on those opportunities. But the bottom line is it’s a negotiation that’s still in process. It’s earnings accretive to retain that asset, and we’ll report back once we close.
Operator: The next question comes from Todd Thomas with KeyBanc Capital Markets.
Todd Thomas: First, Tom, Ed, congrats on your run, best of luck in retirement. Let me — first, I just wanted to take a stab at asking a prior question. I realize Jackson has not started yet. But Tom, maybe, Scott, I’m just curious if you can talk a little bit about where you think there might be opportunity for Jackson to have an impact as you think about the organization today and look ahead?
Tom O’Hern: I’m not going to speak for Jackson. He’ll be starting soon, and you can ask him directly, but I know he does like our strategy of densifying and diversifying our high-quality town centers and he found that very interesting and appealing. Other things he may be considering I will leave to him and let him articulate directly to you and others on this call.
Todd Thomas: Okay. And Tom, you’re staying on for a few months as an adviser, what kind of time line would you expect for Jackson to get sort of fully situated with the platform, touring assets, markets meeting with key retailers? What’s the process like for him really stepping into the CEO role?
Tom O’Hern: Well, many of you on call know him. I mean, he’s going to hit the ground running. I can guarantee you that. So I think there’ll be a lot of travel visiting our offices, visiting our people getting going. Ed and I are still on the board through our current term, which runs through May. So people have access to both of us and I imagine he’s going to be a very quick study and hit the ground running. So I think that will all happen very, very quickly. And he’s already fairly familiar with the Company, did his due diligence and I can almost give to you, he will get it faster.
Todd Thomas: Okay. That’s helpful. And if I could just get one in for Doug. I appreciate the detail around the S&O pipeline and the lease signings and LOIs that you’ve executed around the ‘24 expirations. Can you talk about your expectation for tenant retention during the year and maybe discuss any known move-outs or post-holiday season — seasonality that you’re expecting this year relative to the last few years where there’s been a lot less seasonality than traditionally is?
Doug Healey: Todd, it’s Doug. Thank you. I think — and Scott jump in here. But I think in 2024, our expectation is between 90% and 95% tenant retention. Meaning our expirations — our 2024 expirations between 90% and 95%, we believe, will retain.
Scott Kingsmore: I think the second part of your question was regarding any unanticipated or just fall out following the holiday. And I won’t say there — I don’t think there’s anything out of the ordinary. If we looked at, say, the 2016 through 2019 period, we had some precursor certainly in the fall of tenants that were likely to close, and they were closing in fairly significant routes. We have not had that for the last few years at all. And I can’t think of any retailer that said, look, we’re going to shut down five or six stores following the holiday season. Doug?
Doug Healey: Yes. Todd, we’ve talked about this a lot. I mean many of the retailers that were suffering pre-pandemic just didn’t make it through pandemic. And those that came through, came through in a very healthy way. And as I mentioned in my prepared remarks, there’s a very, very healthy retailer environment out there with very strong balance sheets. I think the retailers — I know the retailers in 2023 and into 2024 already speaking about managing the inventory levels, which is hugely important for the profitability and for the margins which actually makes them stronger. So we’re not seeing really any pullback and our watch list is as low as it’s ever been in 20 years. So I don’t anticipate anything, anything unusual in 2024, if you will.
Operator: The next question comes from Michael Mueller with JPMorgan.
Michael Mueller: Tom, congratulations. It’s been great working with you over the years.
Tom O’Hern: Likewise.
Michael Mueller: And I just have one quick one for Scott. Just curious, what’s embedded in the 2024 guidance for NOI margin improvement relative to what you had in 2023?
Scott Kingsmore: Yes, Mike, I think we’ll see continued margin improvement. We’ve got improvement in rental rate. We’ve got growth in occupancy. Obviously, the pipeline will start to add more and more as we get towards the latter half of the year. It’s still a pretty thick pipeline. In fact, I think the pipeline yields roughly $64 million, $65 million of incremental rent over existing uses. So that will be heavy in the second half. Conversely, like I said, we’ve got operating expenses continue to be somewhat of a drag, not a huge drag, but somewhat of a drag. So — but I do think by the time we get to the end of the year, you’ll see continued margin improvement year-over-year.
