The Macerich Company - Q1 2024

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2024 Macerich Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you would need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would like now to turn the conference over to your speaker today, Samantha Greening, Director of Investor Relations. Please go ahead.

Samantha Greening (Director of Investor Relations)

Thank you for joining us on our first quarter 2024 earnings call. During the course of this call, we'll be making certain statements that may be deemed forward-looking within the meaning of 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. 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 on the investor section of the company's website at Macerich.com. Joining us today are Jack Hsieh, President and Chief Executive Officer, Scott Kingsmore, Senior Executive Vice President and Chief Financial Officer, and Doug Healey, Senior Executive Vice President of Leasing.

With that, I turn the call over to Jack.

Jack Hsieh (President and CEO)

Thank you, Samantha. Good morning, and thank you all for joining my first quarterly earnings call for The Macerich Company. I am grateful for the board of Macerich, selecting me at this time to chart a new direction and lead the company, especially in light of our recent 30-year listing celebration on the New York Stock Exchange. I am very optimistic and confident about our company's future. Since March first, I've had the privilege of meeting over 80% of our company's associates in each of our six office locations and in my property tours of 22 of our largest assets. I can tell you that there is tremendous passion and desire for change and new leadership from our associates. Our well-tenured team members across many business lines are excellent. Many of our assets are fortress-like in terms of their market position, annual customer visits, tenancy, and overall sales production.

While we have proven operational processes, there is even more room for improvement. I also met with several tenants and joint venture partners of Macerich, who are excited about moving forward with us. In our most recent quarterly board of directors meeting last week, I outlined my strategic plan for the company, our path forward, which focuses on the following key objectives that we expect to take 3-4 years to complete. Number one, simplifying the business. We expect to sell assets and consolidate certain JV interests over time. Asset sales will be focused on whether a center is core to our strategy, including sales per square foot and other factors, such as debt in place, trade area positioning, anchor positioning, city dynamics, et cetera. With regards to JVs, we will be very selective on deploying capital to consolidate JVs.

Number two, improve operational performance by increasing NOI through backfilling certain vacant anchor locations, NOI improvement in our large Eastern Seaboard assets, NOI from our current executed lease pipeline that will produce $70 million in incremental rental revenues from new deals in 2024, 2025, and 2026, and improving permanent occupancy throughout the portfolio. We will be very selective with regard to new development and redevelopment spend. Near-term projects include the expansion at Green Acres and Flatiron Crossing. Number three, reduce leverage to the low- to mid-6x is a major priority for Macerich. In addition to focusing on our core business, which generates annual free cash flow after dividends of $150 million, and executing on our asset sale plans, we also plan to return 4-6 properties back to lenders at loan maturity.

This will take time, but we have a path to achieving this objective. One of the key intentions of our plan is to increase the competitiveness of our cost of capital, and if the market responds the way we expect, we may opportunistically issue equity over time to accelerate the deliveraging strategy. Based on our plan, $500 million of new equity reduces leverage by two-thirds of a turn. By executing on this plan, we will concentrate our portfolio in our best properties, which are thriving retail centers, and will have a substantially stronger balance sheet. This will position Macerich to be offensive on acquisitions, reinvestment, and select development. In the last 60 days since I've joined the team, we have already started executing this plan.

For example, we are underway on several asset transactions, which include property sales, consolidation of JV interests on certain assets, and potentially giving back properties to lenders. The timing of these transactions will impact our reported financial results and include non-cash items that are difficult to forecast. So for the time being, we will be withdrawing our 2024 forecasted FFO per share guidance. We plan on reissuing guidance at the right time as we have more clarity on the timing and certainty of these transactions and initiatives that we are implementing as part of our strategic plan. Three weeks ago, I hosted a company-wide town hall Zoom meeting, whereby I presented our company's new mission statement, corporate values, and property regrouping. Our mission at Macerich is to own and operate thriving retail centers that bring our communities together and create long-term value for our shareholders, customers, and partners.

Our six corporate values are excellence, integrity, good relationships, empowerment, optimism, and fun. I, along with our senior leadership team, are constantly reinforcing all of us to challenge the status quo across the organization, do what you say, do your absolute best, be transparent, work together seamlessly, take ownership, be confident, and celebrate our success and progress as we strive to complete our strategic plan and mission statement. Again, I am very excited and confident about what our company will look like in the coming years. With that, I'll turn the call over to Scott to go through our first quarter results and financing activity. Scott?

Scott Kingsmore (CFO)

Thank you, Jack. This quarter, we were pleased by the continued strength of our operating fundamentals, namely by continued robust leasing volumes, year-over-year occupancy growth, and strong base rent leasing spreads, each of which Doug will speak to following my commentary. However, quarterly FFO did not meet our expectations. FFO per share for the first quarter was $0.33. This quarterly FFO result was $0.05 less than our expectations and guidance, and $0.10 less than the first quarter of 2023 at $0.43 per share. The primary major factors contributing to the quarterly FFO per share change versus our expectations are as follows: $0.025, or roughly half the miss, versus our guidance, was due to the impact from express and resulted from reserves taken against past due rent and from write-offs of straight-line rent and other non-cash receivables.

I will provide more color on the potential impacts from this retailer in a few moments. The balance of the decline in FFO relative to our expectations came primarily from one-time, non-recurring costs associated with our recent leadership transition, mainly from legal, search, and consulting costs. Two, reductions in lease termination income. Three, declines in straight-line rents. And lastly, declines in the quarter from our on-premise advertising business. In addition to these factors that I just mentioned, which were not part of our prior guidance, the following other primary factors contributed to the remainder of the 10-cent difference in FFO relative to the first quarter of last year, each of which are consistent with our guidance and expectations. One, the $5 million increase in interest expense. Two, a $3 million decline in land sale gains.

Lastly, three, from various non-recurring other income that was recognized during the first quarter of 2023, but did not repeat in 2024. During the quarter, same-center NOI, excluding lease termination revenue, decreased 1.9%. Our expectations from our original guidance were for only a nominal increase in same-center NOI during the first quarter, with a continued pickup thereafter throughout 2024 due to tenant openings from our strong lease pipeline. The quarterly underperformance versus expectations in same-center NOI was primarily due to, again, Express, and to a lesser extent, from lower advertising income in the quarter.

As Jack noted, at this time, we have withdrawn our prior guidance for 2024 funds from operations, given that our earnings will be impacted by transactions contemplated within our strategic plan, including asset sales, consolidation of selected joint venture assets, and potential givebacks to our lenders, the timing of which is uncertain and cannot be estimated at this time. In addition to earnings impacts from our first quarter results, here are a few other items to highlight that may impact our earnings results for this year in 2024. One, we did not anticipate the bankruptcy filing of Express within our earnings guidance. To frame Express, we have 23 stores with them and approximately $15 million of total rent at our share.

Based on my prior commentary, this event has already had a negative impact on the first quarter and will continue to have a negative impact for the balance of this year and into next year, when all store closures and any rent modifications that are negotiated-... anniversary. With the filing having only just occurred, it is very early days in this process. Our current preliminary expectations are that this could have a range of $0.05-$0.06 negative impact on 2024 FFO, including the impact that we're we just recognized in the first quarter, and that it could have a roughly $0.06-$0.08 negative impact on FFO on an annualized basis. At this time, it seems that at least 15 Macerich portfolio Express stores will close, likely within the second quarter.

These 15 closures alone will have an approximately 50 basis point negative impact on our small shop occupancy. These are generally good locations and should be able to release them well over time. As well, we do not have visibility at this time into a significant amount of lease termination income, so our initial estimates for $10 million of such revenue in 2024 may be cut in half. As Jack noted, it is possible we may acquire our partner's interest in certain assets. These purchases would be FFO accretive, except for the fact that we would have to mark-to-market the below-market secured debt that we would assume with those acquisitions. Such non-cash charges would make those transactions FFO diluted by roughly $0.02. Now, on to balance sheet matters. We continue to make good progress addressing our debt maturities.

On January 10, 2024, our joint venture closed a $24 million refinance of the existing $23 million loan on Boulevard Shops in Chandler, Arizona. The new loan bears variable interest at SOFR +2.5%. It is interest-only during the entire loan term and matures on December 5, 2028. On January 25, 2024, we closed a $155 million refinance of the existing $117 million loan on Danbury Fair. This new 10-year loan bears interest at a fixed rate of 6.39% and is interest-only during the majority of the loan term. On March 19, 2024, we closed a three year extension of the $85 million loan on Fashion outlets of Niagara.

This extended loan will bear the same fixed interest rate of 5.9% and will mature in October of 2026. We recently repaid in full the remainder of the $8 million loan on Fashion District Philadelphia, which is now fully unencumbered. We are in the process of closing a two year extension of the $151 million loan on The Oaks, which matures on January fifth of 2024. The new interest rate during the first year of the extended term will be 7.5%, which then increases to 8.5% during the second year of the extended loan term. We are in the process of closing a refinance of the $256 million loan on Chandler Fashion Center. The loan matures on July 5th of 2024.

The new five-year loan, which is expected to be $275 million, will bear a fixed interest rate that is yet to be locked. Despite the recent rise in treasury yields, the financing market for Class A retail real estate remains strong, but with an increase in rate expectations relative to prevailing rate curves from earlier this year, and also relative to our expectations at the beginning of the year. We currently have approximately $640 million of available liquidity, including $465 million of capacity, available capacity, unborrowed capacity on our revolving line of credit. With that, I will turn it over to Doug to discuss the leasing and operating environment.

Doug Healey (EVP of Leasing)

Thanks, Scott. We had another strong quarter in terms of leasing volumes and metrics. Occupancy at the end of the first quarter was 93.4%. That's down slightly from Q4 2023, but an improvement of 120 basis points year-over-year. We obviously expect this metric to decrease slightly, given the recent news on Express bankruptcy and future potential store closings. Nonetheless, our team is working diligently to backfill these spaces as soon as possible. First quarter sales were basically flat when compared to first quarter 2022. Sales per sq ft as of March 31, 2024, were $837. That's up $1 when compared to the first quarter of 2023. Trailing twelve-month base rent leasing spreads remained positive at 14.7% as of March 31, 2024.

That's down slightly from the last quarter, but an increase of 810 basis points when compared to March 31, 2023. In the first quarter, we opened 540,000 sq ft of new stores. That's almost 300% more square footage than we opened during the same period last year. The most notable opening of the quarter was the highly anticipated Caesars Republic Hotel, which opened March 6 at Scottsdale Fashion Square. This modern 11-story, 265-room hotel is situated on the north side of the property and will be a great amenity for our tourism customers. In addition to its luxurious rooms and suites, the hotel also features the fabulous restaurant, Luna, by world-renowned chef, Giada De Laurentiis.

Other notable openings in the quarter include a flagship Foot Locker at Tysons Corner Center, Rothy's and Khaadi also at Tysons, J.Crew at The Village at Corte Madera and Danbury Fair, Starbucks at Deptford Mall, Pandora at Valley River Center, Maje and Sandro at Scottsdale Fashion Square, Round1 at Danbury Fair, and Kalm at SanTan Village. Now let's look at the new and renewal leases we signed in the first quarter. In the first quarter, we signed 222 leases totaling just over 1 million sq ft. This represents a 14% increase in leased square footage relative to the first quarter of 2023. And let's keep in mind, 2023 was a record leasing year for us, dating back 30 years to when we first became public. As is the norm in the first quarter, 2024 lease expirations were a top priority.

To that end, we signed a 21-year deal renewal package with Abercrombie & Fitch, an 18-deal renewal package with Luxottica, a 10-deal renewal package with GNC, seven renewals with Verizon, five renewals with T-Mobile, and four renewals with Zumiez. So with those and others, we now have commitments on 65% of our 2024 expiring square footage that is expected to renew and not close, with another 24% in the letter of intent stage. Other notable new leases signed in the first quarter featured Gap at Queens Center, Burberry, Marc Jacobs, Rudsak, and Hollister at Fashion Outlets of Chicago, Tillys at Scottsdale Fashion Square, and Miniso at Eastland. In the emerging brands category, we signed new leases with Faherty and gorjana at Twenty Ninth Street, gorjana, Vuori, and Yeti at Tysons Corner, Warby Parker at Danbury Fair and Queens Center.

Lastly, we signed a new lease with Cheesecake Factory at Tysons Corner Center. Cheesecake will join the recently signed Maggiano's and Level99, and will round out our food and entertainment initiative in Tysons East Wing. Turning to our leasing pipeline. At the end of the first quarter, we had 130 leases for 1.8 million sq ft of new stores, which we expect to open in 2024, 2025, and early 2026. In addition to these signed leases, we're currently negotiating leases for new stores totaling 500,000 sq ft, which will open in 2024, 2025, and early 2026. So in total, that's nearly 2.3 million sq ft of new store openings throughout the remainder of this year and beyond.

And again, 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. This leasing pipeline of new store openings now accounts for almost $70 million of incremental rent in aggregate, which will be realized in 2024, 2025, and 2026. This incremental rent will continue to grow as we continue to approve new deals and sign new leases. So to conclude, our leasing and operating metrics were very solid in the first quarter. Leasing volumes were extremely strong, in excess of square footage leased during the first quarter of 2023, thus maintaining a very strong pipeline of stores that will open this year, next year, and into 2026. We opened over 500,000 sq ft of new stores.

That's 300% more sq ft than we opened during the same period last year. Occupancy was 93.4%, up 120 basis points year-over-year. However, we do expect this metric to decline slightly as a result of the Express bankruptcy. Lastly, base rent leasing spreads were 14.7%. That's an increase of over 800 basis points from the first quarter last year. With that, I'll turn it over to the operator to open the call up for Q&A.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please limit to one question and one follow-up. Please stand by for the first question. The first question comes from Jeffrey Spector with Bank of America Securities. Your line is open.

Jeffrey Spector (Managing Director)

Great, thank you. My first question, I guess let's focus on Jackson, your comments around the, you know, objectives and the time frame. I think you said, you know, 3-4 years, and completely understand there's a lot to do in the 3-4 years. I guess, can you be more specific on some key objectives for the next year? When you presented to the board, you know, did you lay out, let's say, some, yeah, key objectives for, let's say, the next 12 months?

Jack Hsieh (President and CEO)

Hi, Jeff. Good morning. Yeah, we actually did that. We did a year-by-year analysis that we presented last week. I guess I'll give you the fundamental building blocks that we look at as it relates to getting leverage to dial down into that low 6x debt-to-EBITDA range. You could consider that the assets that we plan to dispose or give back referred to would result in a 100 basis points decline in our leverage statistic. The NOI increase over this period of time, which accounts for about 60 basis points of reduction in our debt-to-EBITDA ratio. Of that 100 basis points, approximately 60% of that is related to that $70 million of incremental rental revenue that Doug and I talked about.

And the final 65 basis points of leverage reduction is accounted for in that $500 million of common stock issuance as a placeholder. So those three fundamental building blocks are what gets us, you know, down to that target level. I can tell you that the sales and give back analysis, it's about 10 properties, plus or minus. You know, we can't do that all at once. There's a very specific sequencing that we're going through that will take, you know, about 3-4 years to accomplish. The NOI that we talked about, that's also a three-year buildup, although every year you'll see pieces of it come in. And, you know, the common stock piece is kind of at our discretion. We don't need to do it right away.

We're gonna deliver just through this process, so we're very opportunistic about that. But I think what you'll see us do, Jeff, is as we get more clarity around FFO guidance, we'll probably start to talk about specific sale transactions and JVs and lender give backs that are actually executed or under contract, so to speak. We're in process right now, so we can't comment on it, but in the coming months, we'll be able to give real clarity around specific names of assets.

Jeffrey Spector (Managing Director)

Thank you. Very helpful. My follow-up question, then, you know, thinking about, you know, these key objectives and then the ultimate goal, right? You talked about going on, then, you know, having the cost of capital to go on offense. I guess, is that in a couple years, or do you feel like, you know, if you're able to chip away and start achieving some of these objectives over the next year, you'll be able to do it? I mean, and positive, just to say, obviously, on the leasing side, you guys, you know, continue to do extremely well, which is, of course, critical.

Jack Hsieh (President and CEO)

Yeah, look, when I joined this company, I didn't just come here to deliver the company or try to sell the company. You know, candidly, I'd just be retired. I saw a great organization that can do a whole lot more off this platform. And when I looked at the plan to deliver, to be honest with you, it's a pretty simple plan. You know, it's 10 assets, you know, it's NOI that is coming. And, you know, the common stock thing is a lot lower than probably I initially expected from the outside looking in. You know, if we wanted to go quicker and not sell any properties, you know, that's issuing $2 billion of common stock to get us down into the low 6 times area, which we would never do.

Makes no sense, you know, just from a dilution standpoint. So I feel like this plan gives us the best opportunity to take advantage of what I think are gonna be really interesting opportunities. In my former job, there were 20 public-listed net lease companies, 20. In our space, there's basically 2 companies, public, that focus on enclosed, you know, shopping centers and lifestyle centers. We're one of them, and I think there's honestly gonna be some opportunity in the future to look at really interesting centers, you know, in time. So my objective is to get our organization ready for that pivot when it comes, and that's what we're gonna do.

Jeffrey Spector (Managing Director)

Great. Thank you.

Operator (participant)

One moment for the next question. Next question comes from Greg McGinniss with Scotiabank. Your line is open.

Greg McGinniss (Director)

Hey, good morning out there. Jackson, you really seem to have hit the ground running here. How much of the current strategic plan was in place when you joined, versus your view on what needed to be done here? And what's been your internal messaging to, to the company, regarding your vision for the future of Macerich?

Jack Hsieh (President and CEO)

Thanks, Greg, for that question. So this started day one, when I joined. First day I started, I went to look at three of our shopping centers, two of them in Southern California, and then the following week, you know, came into the Santa Monica office. I had an opportunity to work with the leadership team early on to really understand kind of how we did business, and I saw a great opportunity to challenge the organization to focus on a mission statement, you know, corporate values that, you know, are not just words, that we will live. But I also saw an opportunity, which to me was interesting, is to focus on the fact that we're really in the hospitality business, if you think about it.

I know we talk about shopping malls, but, you know, look, our customers are our tenants and the people that come into these properties. And those people have a choice to go and do a lot of different things, shop online, go somewhere else. So we have got to make our environment have the best merchandise mix, you know, which includes, you know, concepts like Dick's House of Sport, Life Time Fitness. There's great entertainment venues that we can bring in, food venues. At the end of the day, it's really more visits, longer dwell time in our centers.

And I've had the opportunity to describe that vision of we are in the hospitality vision business to everyone on this company via town hall, and it, we did it again at our recent property management conference that we held in Scottsdale a couple weeks, three weeks ago, where we had, you know, 200 people, you know, from the property level, you know, at that center, you know, at that venue. So we wanna make. You know, we wanna, we wanna approach this business in a different way. It's not just, you know, providing, you know, anchors and shops, but it's really trying to, trying to make a difference on, on what our customers need and want. Other things that I sort of initiated coming in, not just the mission statement, the strategy, we came up with a property ranking system.

That's not gonna be new to you. You know, we've got the fortress assets, the steady eddy, and the eddies, three classifications. We're launching a formalized capital allocation process. I'm looking at a process review of our lease process. How do we start rent commencement dates faster? We're evaluating a CRM within our leasing team. I'm looking at offshoring concepts and AI initiatives, all in the realm of trying to make ourselves better, more efficient, so we can be better attuned to what our customers need and drive more traffic in these centers. So I'm only halfway through our visits, but I can tell you that kind of, I have very clear vision on what we need to do, and I think it's really achievable.

Greg McGinniss (Director)

Thank you for that, Jackson. I guess in thinking about the assets that you're looking to sell and not give back, are those generally, you know, in that, you know, I guess as you phrased it, the eddy category, or are there some stronger assets in there that you're looking to offload to maybe control dilution a little bit?

Jack Hsieh (President and CEO)

I'd say it's a mix of, you know, without getting specific names, there are assets, you know, in our middle grouping, that are good, but not necessarily strategic for what it means for us, maybe not as much upside. And so if we can redeploy capital that way, it'll be better for all. And of course, there are a number in that third category, which, you know, some of them have debt on them and things like that, where we'll be very, you know, methodical about trying to, you know, move through those assets over time.

Greg McGinniss (Director)

Mm-hmm. Okay, and then just one final question on the asset. Asset-specific question is on Santa Monica Place, which I recognize you're in negotiations with the lender right now. So I'm under some, you know, assumption that you plan on trying to hold on to that if you can come to a good resolution there. But did notice that it was pulled from the development pipeline. Is that. Did something happen on the development side, or is that simply because of its current status?

Scott Kingsmore (CFO)

Yeah, Greg, I'll take it. Scott here. Good afternoon. You know, we continue to face challenges in the broader marketplace here in Santa Monica. It impacts our progress, it impacts tenancy. We've got a challenging underlying capital structure, and that all led us to making the decision to default on the loan in early April. If you look at the asset, just to frame the financial impacts of it, the asset's about $0.01 FFO dilutive, increases our leverage by about 20 basis points. Beyond that, we're not in a position to provide any more information, though. It's, as you mentioned, subject to ongoing discussions with our lender.

Greg McGinniss (Director)

So is it not worth the investment anymore at this point on the development side, or did those pause?

Scott Kingsmore (CFO)

Yeah, again, you know, challenges in the marketplace, challenging underlying capital structure led us to the conclusion. Gotta leave it at that, though, Greg.

Greg McGinniss (Director)

All right. Thanks, Scott. Appreciate it.

Scott Kingsmore (CFO)

Sure. Mm-hmm.

Operator (participant)

One moment for the next question. The next question comes from Samir Khanal with Evercore. Your line is open.

Samir Khanal (Equity Research)

Hi, hi, everybody. Jackson, I guess just curious, given where rates are today, right? I mean, how realistic is that goal on dispositions today? I mean, and I know you talked about 10 assets, but is that more of sort of a... I mean, it's not really the next 12 months, but you're talking sort of long term. Just trying to figure out the timeframe on these asset sales.

Jack Hsieh (President and CEO)

Yeah, I mean, we assumed sort of a, in our plan, a base rate assumption of 6.5%, you know, over the next three years. So I'm sure that, you know, it could be higher, it could be lower. And, you know, if we're the assets that we're considering, we think, you know, I would describe some as having very attractive below-market financing that is assumable. So that would be maybe one category. There would be another category that might be unencumbered properties that, you know, obviously would have impact to current financing rates.

And then I would describe another category as, you know, I haven't talked about too much, is, you know, we have a handful of, you know, freestanding, very monetizable outparcels that we could sell, that include tenants like Costco, Home Depot, BJ's, Lowe's, Walmart, which would probably not be something we do in the short term, but perhaps, possibly later in the, in the kind of timing cycle as we move forward. So it's, it's not just centers. It's, there, there are very there are a lot of different, asset opportunities that we have, and we're very cognizant of rates. But just so you know, how we've built our assumptions, we sort of used a, a 6.5% base rate on any refis.

Samir Khanal (Equity Research)

Okay, got it. And then just maybe loop in Doug here. I know, you know, you guys talked about Express and with all the store closings. I guess, Doug, give us an idea of how you think about the backfilling of these boxes or shop space and what's been sort of the interest level as we think about the rents are gonna come offline, but you know, at what point do we start to backfill with newer tenants? Thanks.

Doug Healey (EVP of Leasing)

Hey, Samir. Yeah, as you know, we and our peers went through this in a big way coming out of COVID, when store closures and bankruptcies were expedited by the pandemic. If you think about Express, you know, think about back in the early days, they were the darling of the industry. So because of that, they got some of our best malls, and in those best malls, they got some of the best space. So I guess if there is a silver lining, and nobody likes closures, nobody likes bankruptcies, but the space we're gonna get back is in some of our best properties and, you know, 40-50 yard line locations. I think about, you know, getting space back at Kings Plaza or Danbury or Flatiron, Freehold, Green Acres.

You know, those are very, very well-leased properties. Space is hard to come by, so, you know, we view it potentially as a silver lining. But, it's gonna be a process. It's gonna take, you know, it's gonna take time, just like it did coming out of COVID, but, our team is working very, very diligently to backfill.

Samir Khanal (Equity Research)

Okay, thank you.

Jack Hsieh (President and CEO)

Hey, Samir, I'll just add in, this is Jackson, on just backfilling anchors. You know, one of the reasons why we've... If you think about our mission statement, is we're, we wanna direct, you know, our proceeds that are available for redevelopment or capital, you know, into our existing centers that we think can drive and align, right? So think about two different concepts out there. One, you know, is Dick's House of Sport. I've toured, you know, with that stack, his new store that's opened at Ross Park Mall in Pittsburgh. Unbelievable, right? Also visited their store up in Rochester at Eastview Mall. You know, we have a number of properties under discussion with them in our existing portfolio, but candidly, love to do 8-10, if not more.

These things aren't cheap, they cost money, but they do, in my opinion, bring additional regular traffic, you know, for what they try to do. I think that's one of the best concepts I've seen. Life Time is in three of our centers. You know, they were my number one tenant at my former company. Know the company well, know what they do. We'd like to have more in our centers. Once again, all of these take capital. But as you think about what we're saying, we're gonna drive to create a really, really strong retail portfolio through reinvestment, you know, into the centers. So hope that helps.

Samir Khanal (Equity Research)

Thank you, Jackson. Yeah, no, that, that helps. Thank you. Congratulations on the new role, by the way. Thanks.

Jack Hsieh (President and CEO)

Thanks.

Operator (participant)

One moment for the next question. The next question comes from Floris Van Dijkum with Compass Point. Your line is open.

Floris Van Dijkum (Managing Director)

Hey, thanks, Jackson. Welcome on board. A question, and maybe this is more tilted towards Doug, a sort of follow-up on the Express. Obviously, you're losing 15 stores. What was Express paying? What is the mark-to-market opportunity in your view? You talked about the fact that they're in good locations. What, you know, what potential upside, potentially, could we expect once those spaces get re-leased?

Doug Healey (EVP of Leasing)

Yeah, Floris, I'll take it, and then Doug will correct me where I'm wrong. You know, those 15 stores or whatever the number ends up being, it's high-quality real estate. I don't want to get into specifics about what they were paying. You know, I kind of gave you the aggregate exposure for the company, so to give you some kind of sense, and they roughly averaged 8-10,000 sq ft. You know, we're doing, we're taking the space back, I think, fundamentally in the backdrop of a very, very strong leasing environment. You know, so it's not like we're, you know, in the heart of COVID, when we're facing a spate of continued bankruptcies and retailer failures.

So, you know, we hold out some optimism we'll be able to backfill and replace that rent in, in, in relatively short order. But, you know, we have a task ahead of us. As I mentioned, it's 50 basis points of lost occupancy, and you can, you can do the math on that. So, you know, we definitely have some work ahead of us, but the, the leasing environment is strong. Doug, anything? Yeah, and I think the real story here, Floris, is, yeah, it's, it's about the economics for sure, but it's replacing underperforming, sort of obsolete tenants with new, depth and breadth, and that's what we do. And I think Jack made some really good points when he talked about Dick's House of Sport, Life Time. I mean, you think about who they're replacing.

They may be replacing a JCPenney or a Sears, and we're getting newness, we're getting excitement, we're getting innovation, and I put Express right in that category. It may not be an anchor, but it's gonna give us the ability to refresh our centers and diversify our centers, and that really is our goal.

Floris Van Dijkum (Managing Director)

Thanks. Maybe my follow-up question, maybe this is more of a strategic question, for Jackson or for Scott. One of the things that I found interesting is potentially buying out your partners out of JVs. Obviously, that would require capital. Would you also consider buying out some of your partners in some of your... 'Cause some of your best assets are actually held in JVs. Would you consider using equity or swapping equity for the remaining stake in those, some of those assets?

Jack Hsieh (President and CEO)

... If it was, I'll take that. Now, it-- that's not contemplated in the plan. I would say if the opportunity arose in the future where the asset was marked at the right cap rate and, you know, we've got a competitive cost of capital, of course, we would look at that. You know, I go back to, I'd like to try to simplify the business. Clearly, consolidating JVs on our best properties is simplifying the business, but it's gotta make economic sense, and I don't think we're there yet in terms of where the market is, you know, today for transparency around where cap rates trade for A++ centers. And I think our cost capital is not at its best position right now, so, but we're evaluating that, obviously.

Floris Van Dijkum (Managing Director)

Got it. Okay, thanks.

Operator (participant)

One moment for the next question. The next question comes from Vince Tibone with Green Street. Your line is open.

Vince Tibone (Managing Director, Head of US Industrial and Mall Research)

Hi, thanks for taking my question. Can you discuss your bigger picture or strategic views on the vacant anchor boxes in your portfolio? Like, just how do you plan to unlock the highest and best use of the land at each parcel, also working towards your deliveraging goals? Because I know, you know, there's a lot of entitlements in place already. So are you guys gonna pursue any mixed-use opportunities? Could that be a source of funds, selling those to, you know, third-party developers? Just curious how you're thinking about that dynamic.

Jack Hsieh (President and CEO)

Yeah. Hey, Vince, good morning. It's Jackson, and you know, to be back, your report was kind of eerily funny when it came out last week, and correct, except the nature of the assets are not correct, but the concept was spot on. So thanks for putting that out there. Look, we have 18 vacant anchor locations within the portfolio. Obviously, like, in centers that are in our third bucket, if we've got vacant anchors down there, we're not probably gonna execute on them. I can tell you that we just purchased or agreed to purchase a vacant anchor location for one of our assets in our middle bucket. And I think what we're looking at is, you know, at the end of the day, what is best for the center?

And I can give you a good example of one property, without naming names, where we spent quite a bit of time looking at a densification on the end cap of that property. And at the end of the day, we chose to change directions and put a Dick's House of Sport in that end location. Candidly, I think it's better for the center. I think it's better for what we're trying to do right now. There may be densification opportunities on another quadrant within that property, but you know, right now, our balance sheet is not where I want it to be, and so we're going to use the capital we have to make the best decisions on making, you know, our fortress and steady Eddie properties as strong as they can be in terms of thriving.

You know, if there's opportunities to monetize pieces of our development, for sure we'll do that. But now, that being said, at Flatiron, that's a much more complex opportunity, which got great entitlements from the town, and we will pursue a more vertical build on that location because it dictates it.

Vince Tibone (Managing Director, Head of US Industrial and Mall Research)

No, thank you for that color. And then just another one on the balance sheet for me. I mean, do you plan to unencumber any assets in the near term just to, you know, improve the unencumbered pool and potentially allow for more unsecured borrowing options down the road?

Jack Hsieh (President and CEO)

I would say, like, the easy button would be, we've got some renewals on properties, some of our better properties, that are candidly at much higher rates than, you know, make me happy. So that would be kind of a great source of repayment right out of the gate. You know, as it relates to looking at longer term, what the liability structure looks like, you know, I think we'll continue to evaluate it, if it makes sense. But until we get down into the low 6x leverage levels, I think we're just gonna stay the course right now.

Vince Tibone (Managing Director, Head of US Industrial and Mall Research)

Makes sense. Thank you.

Jack Hsieh (President and CEO)

Thank you.

Operator (participant)

One moment for the next question. The next question comes from Linda Tsai with Jefferies. Your line is open.

Linda Tsai (SVP)

Hi, thanks for taking my question. Jackson, congrats on the new role. While giving guidance is on hold, in addition to monitoring leverage, what other indicators would you point investors to, to assess the success of the earlier strategies you mentioned to rightsize the portfolio?

Jack Hsieh (President and CEO)

So, I mean, Linda, thanks for taking that question, asking that question. You know, success for us would look like $1.80, you know, in that area, per share of FFO, you know, 3-4 years from now, you know, with, with a leverage level in the low 6x. Now, obviously, we've made certain interest rate assumptions, and there's a lot of different timing things that can happen. But to me, that success would look like that for us. One other aspect that I didn't mention, you know, in our prepared remarks, but, you know, we talked about, you know, that 100 basis points of NOI improvement that can help us on the leverage front. Obviously, also, it helps us on the FFO front as well, right?

But one piece that I've alerted, you know, we spent time with the team on is, if you look within our portfolio, the large majority of our portfolio has recovered from an NOI standpoint, you know, to pre-2019 levels, i.e., pre-COVID levels. There are 6 properties on the eastern seaboard which are behind, and they're behind, but to the tune of about $39 million in NOI, 6 properties. You know, I've talked to the team about it, you know, and there, I think there are opportunities to close the gap, but that will be an initiative that's very important for us, you know, as part of that NOI improvement to help us deliver and drive more earnings.

I think there's plans in place for each of those six to get there to 2019 levels or better, you know, within the next three years.

Linda Tsai (SVP)

To reach that $39 million, do you have to invest a lot of CapEx?

Jack Hsieh (President and CEO)

I would say it's not major CapEx. You know, it's really repositioning of tenants. You know, I just think in the East Coast, it was just it was, it had more severe impact with COVID, and just those centers were already performing very well. So it's, it's some of it is repositioning different merchandise mix and tenancy. Some of it is like, for instance, in Freehold, Dick's House of Sport is going into the former Lord & Taylor location. You know, that wing has been hard to lease, so that's going to really activate that end of the corridor. So things like that, you know, we think will be able to help us, you know, get those six assets, you know, back where the rest of the portfolio is.

Linda Tsai (SVP)

Thanks for that color. And then just one quick one for Doug. Besides Express, how would you characterize the tenant credit environment overall?

Scott Kingsmore (CFO)

Look at the watchlist and say it has substantively changed. As a frame of reference, I mean, Express has been on our list for quite some time, you know, frankly, dating to prior to the pandemic. They did not, they did not travel the same path as many retailers did during the pandemic and, and held out to this point. So, as I think about our list, Express by far, by far, in a way, was our most material watchlist tenant. And, I don't, I don't see any substantive changes based on our prior commentary about, about the watchlist, Doug.

Doug Healey (EVP of Leasing)

No, I agree. And you know, we're ultra-conservative when we prepare our watchlist, meaning we'd rather overwatch than under watch. And I would say to date, Scott, correct me if I'm wrong, but to date, our watchlist is probably 30% of what it was pre-COVID, 2019, both in terms of square footage and number of tenants.

Linda Tsai (SVP)

Thanks.

Scott Kingsmore (CFO)

Thank you.

Operator (participant)

One moment for the next question. The next question comes from Alexander Goldfarb with Piper Sandler. Your line's open.

Alexander Goldfarb (Managing Director)

Hey, good afternoon, or I guess, still good morning out there. And Jackson, welcome aboard, Macerich. So two questions for you. The first question is, you know, clearly, you've studied the past history of Mace over time. I think you were involved in the GGP, you know, restructuring. You know, this company has done two different recaps and sort of tried to execute what you've outlined twice before, but, you know, it hasn't worked. And I'm just wondering, you know, the $2 billion of equity when we ran the numbers, really wasn't that dilutive on an FFO, but would certainly put you guys in a really strong position, especially with the energy that you bring to the platform and some of your ideas. So help-- if you just walk.

Talk me through how you know, what you're outlining now, which sounds like a repeat of what the prior team tried twice before, why this will work this time versus just, you know, doing the $2 billion, getting the balance sheet where you want it, you know, sort of today, and being able to execute in what is arguably one of the best retail environments that we've ever experienced, as evidenced by your strong leasing results in the first quarter?

Jack Hsieh (President and CEO)

Okay. Hey, Alex, thanks for the question. I guess the way I would describe it, look, I can't describe what happened here before. I can only tell you, you know, my kind of where I see it today, and have the confidence of executing in my prior opportunity job, where I was at. It really starts with our re-ranking of our properties, which we've done. And the way I would think about it is, I have a third bucket of opportunities whereby if I raise equity in order to kind of rightsize the balance sheet, I'm kind of hurting myself because those are not gonna be assets in the long term that probably are part of the portfolio.

They're absolutely vital right now over the next 3-4 years, as the cash flow from those properties are supporting a lot of the other initiatives within the fortress and steady eddy category of assets. You know, to try to just bluntly issue equity, I feel like what you'd be doing is over-equitizing assets that don't make sense for us strategically long term. They're not gonna be thriving retail centers or they've. You know, when we think about how we rank assets, here at the company, and this is obviously new, you know, we obviously look at NOI and FFO per share, you know, look at what drives traffic and sales, you know, sales per square foot, traffic, obviously sales, but market position is really critical.

You know, the competitive strength of a center, tenant demand of a center, anchor strength, you know, the physical quality. You know, what's happening in the trade area? You know, what are the dynamics, market dynamics within the city itself? You know, shrink, crime. You know, are we aligned with our JV partner? And then there's a lot of, what I call unique factors in our ranking system that would rank up a property down. Too much debt, you know, is it on a ground lease? What could make it go up is development potential. So, what I would tell you in that long kind of answer, Alex, is of the 44 properties, there is a subset where they just don't rank well for us.

And so to raise equity to rightsize the corporate entity, you know, we wouldn't be putting dollars there anyway. So if that, I hope that kind of answers the question. And that's why I feel like the solution we have at hand is, it's gonna be less dilutive, we're gonna get to the same place, and we're gonna actually put the dollars where they're gonna impact us and our shareholders the most.

Alexander Goldfarb (Managing Director)

Yeah, no, look, Jackson, totally, I understand, and you have covered this company for over 20 years, and you know, if it's an emotional, like I love, you know, there are a lot of what you guys do, I love, you know? And I think that you guys have been leaders in certain areas, certainly in executing on Phoenix, you know, back with Westcor. Just the balance sheet, Joe, just though, is one of those issues where, you know, whatever, it's been tackled multiple ways, and that's why, you know, I keep focusing on the equity, and I'm glad your numbers sort of, you know, confirm our $2 billion. Separate question is on the dividend. You know, that's been a source where the company has overpaid in the past.

Clearly, you're gonna be, you know, selling stuff, impairments that gives rise to tax shields, you know, and other things that are going on. I would assume that the dividend is something that will be TBD over time, or are you reaffirming that the dividend level as it stands now will not be changed?

Jack Hsieh (President and CEO)

Yeah, I would basically say, I think the dividend level where we stand makes sense. You know, I don't think we need to lower it. Obviously, we're not gonna raise it aggressively while we're going through this initiative. But, you know, if I gave you kind of the bracket, you know, we're gonna end it $80+ FFO per share, low leverage. You know, you can kind of do the math. There's still good, you know, work, you know, our payout ratio is reasonable, you know, relative to our current payout.

Alexander Goldfarb (Managing Director)

Right. But as far as cheapest form of capital, isn't free cash flow the best?

Jack Hsieh (President and CEO)

It definitely is. But, you know, for us, we don't... We think that the plan we've put in place in terms of sequencing is very methodical, and we've got adequate cash flow from assets that we think will leave the company over the next three to four years to help support us.

Alexander Goldfarb (Managing Director)

Okay, thank you.

Jack Hsieh (President and CEO)

Sure. Thanks, Alex.

Operator (participant)

One moment for the next question. Our next question comes from Michael Mueller with JP Morgan. Your line's open.

Michael Mueller (Senior Equity Research Analyst at JPMorgan)

Thank you. Yeah, two quick ones, I believe. First of all, did the 10 assets, I think you referenced 10 assets that could be sold, did that include the 4-6 assets that you may be giving back, or is it a pool of assets and then 4-6 on top of it?

Jack Hsieh (President and CEO)

No, like I said, it then includes the 4-6 givebacks, so it's roughly about 10.

Michael Mueller (Senior Equity Research Analyst at JPMorgan)

Got it. Okay. And then I guess at the end of the 3-4-year period, do you see the NOI mix being, I don't know, notably different than it is today?

Jack Hsieh (President and CEO)

Uh.

Michael Mueller (Senior Equity Research Analyst at JPMorgan)

Geographically.

Jack Hsieh (President and CEO)

I would say the largely pretty similar. I'd say it's very similar.

Michael Mueller (Senior Equity Research Analyst at JPMorgan)

Yeah.

Jack Hsieh (President and CEO)

I mean, I think the way we've analyzed it is, you know, like, the go-forward portfolio will have much higher sales per square foot, much higher permanent occupancy it already has today.

Michael Mueller (Senior Equity Research Analyst at JPMorgan)

A better growth profile.

Jack Hsieh (President and CEO)

Better growth profile, yeah. Sure.

It's really, you know, kind of focusing on what I call super thriving centers. That's what we're gonna end up with.

Michael Mueller (Senior Equity Research Analyst at JPMorgan)

Got it. Okay. Thank you.

Jack Hsieh (President and CEO)

I think we have time for one more question, operator.

Operator (participant)

Okay, one moment for the next question. The next question comes from Craig Mailman with Citi. Your line is open.

Craig Mailman (Director and Equity Research Analyst)

Thanks. It's actually, Nick Joseph here with Craig. Just one quick one on, G&A as you execute on these initiatives. You know, what, what does the current plan, look like in terms of the, scalability of the current load, versus any kind of efficiencies that you can see going forward?

Jack Hsieh (President and CEO)

Great. Craig, it's Jackson. Yeah, I think, you know, right now, our plan is... You know, we, as I said, you know, we, we're really trying to position the company to be offensive, so we're going through all this. So we're not gonna get there by shrinking G&A, so I think if we're gonna kind of regrow the business. And so I think where the efficiencies are gonna happen, you know, are these process improvements that we're looking at right now. I think there's a lot of ways to make certain work streams more efficient, which in my opinion, helps people have more bandwidth to do things, to improve the business overall, versus get stuck with a lot of different processes that take a lot of time.

Right now, that's where the focus, you know, is. It's not a shrink-to-grow kind of idea. We're just trying to... What we believe we're doing is going to give us a competitive cost of capital to do things with this platform.

Craig Mailman (Director and Equity Research Analyst)

Thank you very much.

Jack Hsieh (President and CEO)

Thank you.

Operator (participant)

At this time, I would now like to turn the call back over to Jack for closing remarks.

Jack Hsieh (President and CEO)

Thank you all for joining us on this call today, and we look forward to hosting my first set of in-person meetings with Macerich and Macerich REIT in early June, along with Scott, Doug, and Samantha. Thank you.

Operator (participant)

This does conclude today's conference call. Thank you for your participation. You may now disconnect.