Macerich Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 6, 2024

There are 12 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Third Quarter 20 24 Macerich Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would like now to turn the conference over to Samantha Greening, Director of Investor Relations. Please go ahead.

Speaker 1

Thank you for joining us on our Q3 2024 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. 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 ks with SEC, which are posted on the Investors section of the company's website at macerich.com. Joining us today are Jack Shea, President and Chief Executive Officer Scott Kingsmore, Senior Executive Vice President and Chief Financial Officer and Doug Healy, Senior Executive Vice President of Leasing.

Speaker 1

With that, I'd like to turn the call over to Jack.

Speaker 2

Thanks, Samantha, and good day, everyone. Before commenting on the Q3, I would like to briefly discuss the change in Scott Kingsmore role at Macerich. Scott has been with Macerich for 29 years and has provided valued service across a variety of roles within the company. I'd like to thank Scott for those many contributions to Macerich over the years and for helping in my transition. Scott was invaluable to me in designing our path forward plan.

Speaker 2

He will be missed by all of us. Dan Swanstrom, who I have worked with for many years when we were both former investment bankers in Morgan Stanley's Real Estate Group, will be joining Macerich as our new EVP and CFO. Dan's banking experience and 2 CFO roles will bring value perspective to Macerich as we continue to execute on our path forward strategy. We will be incurring severance charges in the Q4 related to Scott and 2 other senior executives that will result in a $0.02 reduction to our 4th quarter earnings. Our Q3 saw continued improvement in operational results, a testament to our outstanding team and quality shopping centers.

Speaker 2

Our occupancy, leasing activity and same store NOI improved over the previous quarter. Excluding the Eddie assets, our sales per square foot was $9.10 our occupancy rate was 95.4 percent, same store NOI was 2.8% and traffic was up 1.6%. I'm excited about the progress we are making on our path forward initiative. On the debt initiative, we are targeting a $2,000,000,000 reduction in long term debt as part of that aspect of our plan. Based on closed dispositions, progress with lenders on potential loan givebacks, a binding $157,000,000 purchase and sale agreement for the Oaks and other signed asset agreements, we have approximately 60% of the $2,000,000,000 target or $1,170,000,000 either completed and currently in play.

Speaker 2

The balance of effort to reduce the remaining debt will be sales or givebacks on a few remaining Eddie properties and a focused disposition effort on freestanding retail assets, vacant land sales and smaller open air centers around our regional shopping centers. We will be embarking on that sales process in early 2025. We're making solid progress on achieving the NOI gap that we are solving for in our path forward plan. Based upon expected lease renewals, signed

Speaker 3

but not open leases and re

Speaker 2

leasing opportunities, we are very encouraged with the ability to meet our internal target of incremental NOI that is necessary for our plan. The next 24 months will be critical for us as we target leasing of select current vacant temporary leased spaces and former Forever 21 and Express space in our Fortress and Steady Eddie portfolio. We will share more information on an NOI bridge early next year. A core aspect of our path forward is simplifying the business. The announced acquisition of our partner's interest in Pacific Premier Retail Trust, the entity that owns Los Cerritos, Washington Square and Lakewood Center goes a long way towards helping us meet that objective.

Speaker 2

The overall deal is long term accretive to FFO per share. We will be able to refinance high cost debt at Washington Square and aggressively pursue redevelopment plans for Los Cerritos. Both of these centers are outstanding properties and fit in our fortress and fortress potential categories. We will immediately begin exploring sale options for Lakewood Center and Eddy Property. With that, I'll turn the call over to Doug for more leasing color.

Speaker 4

Thanks, Jack. We had another solid quarter both in terms of leasing volumes and metrics. Sales per square foot at the end of the Q3 were $8.34 This is down $1 compared to last quarter. Sales per square foot excluding our Eddie properties were $9.10 Comparative sales in the Q3 were down about 1% from the Q3 2023. Year to date sales are also down about 1% when compared to the same period last year.

Speaker 4

The macroeconomic environment is still in play and except for the super rich consumers remain cautious. Essentials are the primary focus. However, there's been a pickup in discretionary sales of innovative and differentiated products. Retailers that can provide newness are being rewarded. As I stated in the past, we have yet to see a correlation between sales and retailer demand as evidenced by our deal flow, which in terms of square footage is 40% greater when compared to the same period last year.

Speaker 4

Regarding holiday, all indications are increases will be in the 3% to 3.5% range versus last year. Given the shortened season between Thanksgiving and Christmas, we expect holiday shopping to begin early and retailers to be more promotional than they were in the last couple of years, which is more in line with pre COVID behavior. Traffic in the Q3 was up 2.4% versus the Q3 last year. Year to date traffic is up 1.6% in the same period in 2023 with 70% of our centers experiencing positive trends. Most importantly throughout the portfolio traffic is back to our 2019 pre COVID levels.

Speaker 4

Occupancy in the Q3 was 93.7%. This is up 40 basis points from the 2nd quarter and up 30 basis points from a year ago. Portfolio occupancy excluding our Eddie properties was 95.4%. Trailing 12 month base leasing spreads remain positive at 11.9% as of June 30, 2023 and this now represents 3 years of positive leasing spreads. In the Q2, we opened 225,000 square feet of new stores.

Speaker 4

This brings our year to date total to 1,000,000 square feet of new store openings. The most notable opening in the Q3 was Primark at Tysons Corner Center. This finalizes the remix of the 70,000 square foot L. L. Bean box.

Speaker 4

Specifically, we replaced L. L. Bean with Primark, Lululemon, Old Navy and Kendra Scott. And not only is traffic in the wing increased by 40%, but we expect combined sales of these four replacement tenants to be at least 5 times what L. L.

Speaker 4

Bean sales were. Now let's take a look at the new and renewal leases we signed in the Q3. In the Q3, we signed 220 leases for 830,000 square feet. Year to date, we've signed leases for 2,600,000 square feet. We're thrilled to announce the signing of a 50,000 square foot restoration hardware Design Gallery in the former Neiman Marcus box at Broadway Plaza in Walnut Creek.

Speaker 4

This is just another great example of transformational leasing and the repurposing of a vacant anchor store within our portfolio. RH Gallery will be an inspiring integration of food, wine, art and design with an immersive retail experience. The deal is being finalized the design is being finalized, but will include 6 contemporary Venetian plastered Mediterranean buildings. These buildings will be connected by 4 gated courtyards leading to a 30 foot high glass trainee and garden restaurant surrounded by fireplaces, fountains and an outdoor wine experience. RH Gallery at Broadway Plaza is expected to open in 2026.

Speaker 4

Another key signing was Chanel at Scottsdale Fashion Square. Chanel will be opening an 11,000 square foot flagship retail boutique in Phase 2 of our luxury development, which is currently underway in the Nordstrom Lane. The store will be the first to market in Arizona and will offer a full range of Chanel's collections, including ready to wear, handbags, shoes, accessories, jewelry, watches, fragrance and beauty. Chanel joins the likes of Hermes, Celine, Tiffany, Van Cleef, Burberry and several other global luxury brands. Opening is scheduled for 2027.

Speaker 4

Looking at our 2024 lease expirations, we now have commitments on 84% of our 2023 expiring square footage of space that is expected to renew and not close with another 13% in the letter of intent stage. So between commitments and LOIs, we're basically done with our 2024 expiring square footage and now well into 2025. In fact, regarding our 2025 expiring square footage, we're about 25% committed with another 35% in the letter of intent stage. In the Q3, only one tenant in our portfolio filed bankruptcy. This tenant had only 2 locations for a total of just 6,000 square feet.

Speaker 4

And as I mentioned last quarter, except for Express in our portfolio, there's only been approximately 100,000 square feet of space subject to bankruptcy filing this year. Turning to our signed not open pipeline. At the end of the Q3, we had 133 leases signed for 1,700,000 square feet of new stores, which we expect to open between now and into early 2027. In addition to these signed leases, we're currently negotiating leases for new stores totaling just under 750,000 square feet, which will open during the remainder of 2024 and into 2025, 2026 and early 2027. So in total, that's almost 2,500,000 square feet of new store openings throughout the remainder of this year and beyond.

Speaker 4

And this leasing pipeline of new stores now accounts for $80,000,000 of incremental rent in aggregate, which will be realized during the remainder of this year and into early 2027. And with that, I'll turn the call over to Scott to go through our Q3 results and recent transactional activity.

Speaker 5

Well, thank you, Doug. FFO per share for the Q3 was $86,000,000 or $0.38 per share, which was consistent with our expectations. This was $14,000,000 less than the Q3 of 2023, which is $100,000,000 or 1.9% during the quarter both when excluding and including lease termination income and was 2.8% when excluding the Eddie Group of assets in our portfolio. The primary factors contributing to the quarterly FFO trends are as follows: 1, a $7,000,000 unfavorable trend in land sale gains which are primarily driven by a large single sale of land in Scottsdale during the Q3 of 2023 2, a $5,000,000 increase in interest expense due to rising rates. 3, the $4,000,000 increase in net corporate overhead due mainly to a relative quarterly change due to a decrease in incentive based compensation last year in Q3 of 2023 and then also due to increased leasing expenses and reduced fee income from the acquisition of joint venture interest during the past few quarters.

Speaker 5

And 4, a $2,000,000 net decrease in other income mainly from a large non recurring adjustment last year in Q3 of 2023. Offsetting these negative factors were a $3,000,000 increase in rental revenue per share. Proceeding now on to balance sheet matters. We continue to make significant positive progress executing the Path Forward Plan by closing or advancing multiple transactions including acquisitions, dispositions and refinancings. Since the end of the second quarter from an acquisition and disposition standpoint, as we reported on our last earnings call on July 31, we sold our 50% interest in Biltmore Fashion Park in Phoenix for $110,000,000 at an implied 6.5% cap rate.

Speaker 5

On October 24, we closed on the acquisition of our partner's 40% interest in the Pacific Premier Retail Trust Portfolio also known as PPRT. PPRT owns Fortress Asset Los Cerritos, Fortress Potential Asset Washington Square and Eddy Asset Liquid Center. The acquisition price was $122,000,000 and the implied weighted average cap rate was 7.4%. This transaction was funded by proceeds raised from our ATM facility. As you will recall, this PPRT acquisition follows the acquisition in May of our partners 40% interest in both Arrowhead Towne Center and South Plains Mall.

Speaker 5

We paid $37,000,000 for Arrowhead Towne Center in May at a 7.2% cap rate. We are under contract now to sell The Oaks for $157,000,000 and expect to close during the Q4 subject to customary closing conditions. During the Q3, we sold $9,400,000 of common equity shares for $152,000,000 through our ATM facility at an average share price of $16.14 These proceeds were used to fund the PPRT acquisition and to reduce leverage on Queens Center. Now I'd like to dive into the financial impacts of the PPRT acquisition to assist in modeling this deal. Bear with me, there's a few steps here to go through.

Speaker 5

On day 1, this transaction is accretive to FFO by $0.01 per share on an annualized basis. Note that this accretive impact does not include the temporary dilutive impact of marking the PPRT debt to market. This FFO impact is then adjusted for the following items. Again, we start with $0.01 We do expect soon to refinance Washington Square early next year at an estimated approximate 6% interest rate. We expect that refinance transaction to be FFO accretive by approximately $0.06 per share, if that recap is done with all cash.

Speaker 5

And as a result, the PPRT transaction is then $0.07 accretive as a baseline FFO measure after considering the Washington Square refinancing. Then, as I mentioned, marking the debt to market, the incremental non cash interest expense that we expect to incur from marking the PPRT debt to market will vary by year since the 3 underlying loans mature in the near term over the next few years. I'll kind of call out the impacts here year by year. In 2024, for the step period this year, the estimated incremental impact of marking debt to market is roughly $0.01 FFO dilutive. In 2025, the estimated incremental impact of marking the debt to market is roughly $0.09 dilutive.

Speaker 5

Reminder, in 2025, Washington Square's debt will be refinanced. In 2026, the estimated incremental impact is reduced to $0.06 of dilution. Reminder that in 2026, Lakewood's debt matures. In 2027, the estimated incremental impact is further reduced to only $0.02 dilutive and a reminder that in 2027 Los Cerritos' debt matures. Then finally in 2028, since all three loans will have then matured, there is no further impact from marking the debt to market.

Speaker 5

And again, referring back to my prior comment, taking into account the Washington Square refinance, the transaction is otherwise $0.07 accretive to FFO. On the refinancing front and then I'm sorry, lastly, we as Jack noted, we do consider Lakewood Center to be an Eddie asset and this property will likely be disposed of in the near term as part of our path forward plan and strategy. On the refinancing front, on August 22, we closed an $85,000,000 10 year refinance of the loan on the Mall at Victor Valley. The loan bears interest at a fixed rate of 6.72% and is interest only during the entire loan term. On October 28, we closed a $525,000,000 5 year refinance of the loan on Queens Center.

Speaker 5

The new loan which replaced the existing $600,000,000 loan bears interest at a very attractive fixed rate of 5.37% and is interest only during the entire loan term. The debt capital markets remain very strong and welcoming for Class A Mall retail and are frankly the most accommodative we've seen in the past 5 years. We're extremely pleased with the execution and the interest rate achieved on the Queen Center refinance. Keeping track of our year to date loan activity in 2024, we have closed $1,300,000,000 of loan refinancings or extensions or roughly $1,150,000,000 at Macerich's share. This year, we have closed or actively engaged in 10 dispositions totaling approximately $1,170,000,000 These transactions include asset sales, lender givebacks or potentially loan modifications.

Speaker 5

These dispositions include Country Club Plaza and Biltmore Fashion Park, both of which have closed 4 in process transactions including Santa Monica Place, The Oaks, The Shops at Atlas Park and Southridge Mall as well as 4 other assets for which we're either in discussions with the lender or negotiating a potential sale transaction. We currently have approximately $667,000,000 of available liquidity, which takes into account both the recent PPRT acquisition closing and the Queen's Center refinance. As reflected on Page 27 of our 8 ks set, we have reduced our leverage to 8.22 times at the end of the quarter, which is an over 50 basis point reduction compared to 8.76 times at year end 2023. Lastly, it is with tremendous pride that I leave Macerich after nearly 29 years of service with the company. I enjoyed working with so many of you on this call today.

Speaker 5

As I look back on the last nearly 3 decades, it is the relationships that I will cherish the most. The relationships with our investors, our analysts, our bankers, our lenders, our partners, attorneys and various service providers. Trust me, the list is long and I will soon be reaching out to many of you. But most of all, it is the relationships with my current and former colleagues at Macerich that I will miss the most. My teammates and my friends, I wish you all the best as we forge on through the path forward.

Speaker 5

Thank you for your friendship. Thank you for your loyalty and support. Thank you for your professionalism. Thank you for your tenacity and your competitiveness and thank you for the vast and many great memories over the years. I will truly, truly treasure these as and many great memories over the years.

Speaker 5

I will truly, truly treasure these as I move on to my next chapter. But in the meantime, I do look forward to handing the reins over to Dan in a very orderly and smooth transition. So now let's get back to the business at hand. I'll turn it over to the operator to open up the call for Q and A.

Operator

Thank you. And our first question will come from Jeffrey Spector with Bank of America Securities. Your line is open.

Speaker 5

Great. Thank you. And first, Scott, feel the same way. Thanks for all your help over the years and best of luck on your next steps. And Dan, we look forward to working with you.

Speaker 5

My first question for Jack is just with the market today pricing in higher rates, I assume a slower Fed cutting cycle. Do you think that impacts any of the plans, the disposition plans or any of the other plans over the coming months?

Speaker 2

Hey, Geoff. Look, rates going up or I'd rather have them going down. So we'll have to see as the new transition occurs in our government kind of what the long term direction of rates will be. But we're still actually ahead of plan in terms of positive plan at the current rate level. If you think about the deals that we just talked about that one point $17,000,000,000 that's those are well in progress.

Speaker 2

We're very confident about those. And really the remainder of what we have left is obviously the Lakewood Center, which has $325,000,000 of debt on it. And we've got a portfolio of really, in my opinion, pretty compelling net lease properties that we believe we can execute well in the mid-7s, if not better. And we're just in the process of kind of getting those assets organized, ready to go to market. Some are being blended and extended.

Speaker 2

Some require discussion with lenders. But the team is the team that I brought over from Spirit are kind of really ready and poised to move forward for that. So I feel really good about just dealing with the 2,000,000,000 And really to me, all eyes are focused on that incremental leasing objective that's really I've challenged the team and we're getting after it right now. So to answer your question, yes, the current rates are not a concern to me right now. And we've got Washington Square that will go into the market and that the rate on that debt is 9%.

Speaker 2

So I know we'll do better than that.

Speaker 5

Thank you. That's helpful. And then my second question, a follow-up. I think Doug talked about the consumer a bit that strength at the high end, but alluding to maybe some weakness at the low end. I guess, can you elaborate on what you're seeing from the consumer?

Speaker 5

Is it certain markets? Is it certain types of assets according to your various buckets? Is it certain categories? Thank you.

Speaker 4

Hey, Jeff, it's Doug. Now we're seeing it across the board. I think our sales have been flat for last 2 or 3 quarters. But again, we're up against some extremely high comps in the past couple of years. And as I mentioned in my remarks, essentials are the key right now, but we are seeing discretionary start to move to those retailers that are providing newness and innovation.

Speaker 4

So that's a challenge for all of them out there. And I think that holiday hopefully between 3% and 3%, 3.5% will be solid that we expect the retailers to be a little bit more promotional. As I said, that's consistent with pre COVID behavior. So that's where we are right now, John. Great.

Speaker 4

Thank you. Thanks, Jeff.

Operator

And our next question comes from florist van Dijkkem with Compass Point. Your line is open.

Speaker 6

Thanks for taking my question. Scott, wish you best of luck in your new ventures. Thanks for your help so far. Jack or Scott for that matter, as we look at the equity that was raised, again, low price, but our calculations around a 7.2% implied cap rate, you put that to work at a 7.4% cap rate. Presumably that should be accretive as I think you discussed in your comments so far, just on a simple basis.

Speaker 6

Maybe could you talk about what this does to your growth rate? Because 2 of these assets in particular, Washington Square and Los Cerritos are 2 of your top assets in our view. How should we think about this for your growth? What kind of impact does this have on your growth going forward?

Speaker 2

Maybe I'll try to take that on, of course. I mean, we and I don't want to get too much into growth rates because obviously we're working through that right now on our 5 year models. I'll talk about that later in the call. But to me, the biggest opportunity for us, for Macerich, the way our partnership agreement was set up with our partner on PPRT, I mean, it had equal kind of control rights on refinancing, it had equal control rights on CapEx, leasing commitments. And in the case of Washington Square and Los Cerritos, we own the Sears anchor location 100% versus the JV.

Speaker 2

So when I looked at that situation, I knew we had great assets. I knew this is going to be really positive once we can kind of get our partner to move with us. And to be honest with you, now that we were able to buy them out, we're just going to be able to accelerate our business plans, which we have on those two properties. And we're going to get after it very quickly with the leasing and development teams. Those are fantastic properties.

Speaker 2

We've got some great anchor solutions up at Washington Square, which we think is going to help unlock that property. We're evaluating the possibility of attracting more luxury into that center given just what's going on in that Portland market. And Los Cerritos, as you know, we've talked about, that's a gem. And we're excited about the entitlements that we have on the multifamily, and we're just trying to lock in the final retail solution that's going to anchor that Sears location. And we're going to continue to upgrade that tenancy.

Speaker 2

It's a fantastic center. And so I would just say like it's going to help our growth rate just because we have the ability to execute, to refinance 9% debt on Washington Square, move forward on some of these development initiatives and just lease, lease, lease without having to be constrained with maybe partners don't have the same ideas given long term interest in those properties.

Speaker 6

Thanks, Jack.

Speaker 2

So it's going to help our growth rate. Yes, it's going to help our growth rate.

Speaker 6

Yes, yes, yes. So that's what it should help you. My follow-up question is, again, that your S and O pipeline has increased. I mean, is it around 300 basis points? And can you maybe talk about the timing of how much of that is going to hit in you talked a little bit about the $24,000,000 potentially hitting before year end, but how much of that is going to impact 25 earnings and how much is beyond 25 and 26?

Speaker 5

Yes, Floris, again the incremental pipeline is $80,000,000 We're now looking out into 2027 that we're doing 2026 store openings. In fact, we just announced the Chanel deal a few minutes ago, which will open up next year. So in terms of the cadence, we expect some of that $80,000,000 is hitting this year currently, as stores open and as stores anniversary that have been recently opened, about $25,000,000 impact in 2024, about a $34,000,000 impact in 2025 and the balance into 2026 and 2027. The good news is we found that that pipeline has only continued to increase, which means the pace of new signings is outpacing the store openings. We do have a pretty robust pipeline.

Speaker 5

So I would think the Q4 may tick down a little bit because we do have a fair amount of openings, exciting openings coming in the Q4, but the environment is great. So the bucket keeps refilling. Lastly, one comment you asked about the spread. Yes, it's roughly a little over 3% between fiscal and leased occupancy.

Speaker 3

Thanks, Scott.

Speaker 5

Sure. Thank you, Flores.

Operator

And the next question comes from Craig Mailman with Citi. Your line is open.

Speaker 7

Hey, good afternoon. Just want to follow-up on the leasing side. Demand continues to be good, spreads continue to head in the right way. How is CapEx trending relative to the expectations in the strategic plan?

Speaker 5

I would say there's really no substantive differences, Craig. We do disclose and have the page number handy, but we do disclose period over period CapEx both from an operating CapEx and of course from a leasing standpoint. And I think you'll find that there's really no substantive differences across periods. In fact, look at Page 17 in the sup and you'll see that. I don't think there's really anything atypical about the environment.

Speaker 5

I'd say one thing to note is, as we made a lot of progress this year and last year and prior years, as we look at our go forward portfolio excluding our Eddie assets, we have leased the lion's share of any available anchor stores. In fact, I think we only have 6 that are uncommitted today. So, a lot of those uses are sitting in our pipeline. We can't wait to get them open and see the traffic and sales energy and energy boost to the properties. But from a CapEx standpoint, the amount of that large space is certainly narrowing and we've got a good handle on it.

Speaker 2

Yes. I'd just say one more thing about on leasing. On the last call, we talked about some of the lease improvement processes that we put in place, AKA like a CRM system that enables the leasing team to put in active comments on what's happening with different space within the portfolio. We've now begun the process of actually ranking space A through F throughout the entire portfolio. Across that A through F are square footage prices based on where we believe current COO current lease rates should be able to be achieved.

Speaker 2

And that's been a project between asset management and leasing. We're taking that information, the A through F, with very specific targets I referenced out of my comments, either vacant space opportunities or temporary space opportunity temporary lease opportunities. And we've kind of overlaid that with our 5 year operating plans. So basically, to cut through it, you get your most value on signing new leases. That's where the highest pickup in cost of occupancy contribution comes from Acetrich.

Speaker 2

So it's just going to be ABC, always be closing. We know what has to close. It has to happen in the next 24 months. And there's very specific space and strategies and accountability on the teams, leasing teams specifically, to get after that. And our asset management team now has the tools in place to actually monitor, evaluate how we're benchmarking across these 5 year plans.

Speaker 2

And we've kind of done full asset reviews. And I would just tell you that that's a much more targeted and really focused approach in order for us to hit that NOI bridge, which is so critical.

Speaker 7

That's helpful. And then just on the follow-up, equity has always been part of the strategic plan. You guys pulled the trigger on a bit this quarter to fund some near term uses. Can you just talk a little bit about I know you went through the PPRT and the $0.07 of FFO, but could you help us kind of think through the time it takes to maybe recoup the dilution on the NAV side of issuing well, at least our NAV. I don't know what you guys are internally, but between that and the uses in PPRT and then just more broadly as you think about equity as a source and part of the funding in the strategic plan, kind of how you're thinking about that going forward, kind of matching it up and minimizing dilution?

Speaker 2

I mean, I'll take a start and then Scott will follow-up. But first of all, when you look at PPRT, if you look at the allocation of cap rates, Washington Square and Los Cerritos were acquired at a 6.8% cap rate and Lakewood in our view was implied 9.6% cap rate for the blended 7.4%. So that's one aspect of how you might think about NAV dilution. The other aspect I would say is, I actually believe that if you did an NAV analysis of our entire portfolio, including JV interests and assets like Fashion Square and Tysons. By consolidating NAV in those two centers, which we believe have a lot of growth embedded not only in NOI but in cap rate compression, as this asset sector continues to stabilize.

Speaker 2

We think we'll be able to exceed any kind of initial NAV dilution that that might be at play. And then plus the other piece is the 9% interest rate on Washington Square. I mean you've got an over levered asset with a high coupon, kind of everyone, us and our former partner are kind of looking at each other, trying to figure out what to do and can't move forward. So I would say that just by virtue of getting off the clock, it's going to enable us to actually drive more growth and sort of be able to capture that NAV accretion by virtue of being able to put the investment in the assets so we can actually take market share. I don't know, Scott, do you

Speaker 5

Jack, great commentary. I have nothing to add.

Speaker 2

Okay. And in terms of like other equity, we were very specific about use of proceeds. So look, we're going to reload our ATM because it's all finished. So don't be surprised about that later next week or something. And I think, look, we're always open to continue to consolidate.

Speaker 2

That's a long term strategy of simplifying the business. I don't have any nothing really to report on active discussions with our partners at the moment. And of course, we'll always kind of evaluate the equity market. It's part of the plan. There's no gun to our head on when we have to do it.

Speaker 2

But we're just continuing to monitor. We like the progress right now. We believe that we're at a really good pace across some varied aspects of our plan, the sales, the givebacks, the NOI pieces. So everything is kind of going well in that regard.

Speaker 7

Great. Thank

Operator

you. And our next question comes from Samir Khanal with Evercore. Your line is open.

Speaker 8

Hey, good morning everybody. I guess, Jack, I mean, I know you talked about focusing on incremental leasing here. But just looking at sales and I know you guys talked about it being flat, but give us an idea of your ability to continue to push rents here. I know leasing spreads have been pretty good, but it's sort of backward looking. But as you think about what you're seeing under the negotiations that you're having with tenants, I mean, kind of what are they saying as you kind of negotiate these leases?

Speaker 8

Thanks.

Speaker 4

Hey, Samir, it's Doug. I can take that one. And I think I alluded to it in my commentary. There really hasn't been correlation between flat sales and retailer demand. And as I mentioned, compared to last year, again, we've had 3 quarters of flat sales, but compared to last year in our executive leasing committee, we've reviewed more than 40% more square footage than we did at this time last year.

Speaker 4

And really led and keep in mind last year was a record leasing year for us. So I think it's a couple of things. I think it's a testament to our portfolio. And I think that the retailers have become very sophisticated. A quarter or 2, 3 quarters really don't affect their long term vision.

Speaker 4

Again, they're signing new leases for 10 years. So they're able to see past that. With regard to your other part of your question about pushing rate, and I think I've talked about this before, as we continue to take as occupancy continues to go up, we take supply off the table. We have this unprecedented retailer demand almost by definition, we're going to have a better opportunity to press rate. But we need to balance that with merchandising, the shopping centers.

Speaker 4

And the rate is the science and the merchandising is the art and you need to have both of them. So as we continue to drive rate, as Jack alluded to earlier, all eyes are going to be on merchandising as well. And if we create a center or centers that are merchandised well, that our shoppers want to come to, the rent is going to take care of itself over time.

Speaker 8

And I guess as a follow-up, when you're talking about flat sales, I mean, what's sort of driving that? Is it luxury that's kind of slowing a little bit? And maybe just provide a bit of color on categories? Thanks.

Speaker 4

Yes. All categories basically are flat. We don't have a lot of luxury, Sameer, the exception of Scottsdale. So that's not really a factor for us. Again, we've had some huge comps in 20222023.

Speaker 4

So it's tough to comp against them, but there's been a change in spending. As I said, really essentials are in play. I think I talked about this on the last call. Discretionary spending really in the last probably 6 to 12 months has turned from discretionary retail items to discretionary services. For example, our services or entertainment, We're starting to see people spend more money on vacations, on entertainment, on leisure activities, etcetera, etcetera.

Speaker 4

They haven't been able to do that for a very long time. And I think that's just a temporary play and everything will come back full circle. We expect that to happen at the beginning of 2025.

Speaker 8

Okay. Thank you.

Speaker 2

Yes. I think if you were looking at Q3, 2024 versus Q3, 2023, the home furnishings were kind of the worst performer of our categories, major categories. Fast food is actually slightly positive. And if you look at the broader other categories like jewelry, general, shoes, restaurants, apparel, they were all just slightly 1% or so negative. So and within those, if you went into the detail of those, you'd see some up 3%, some down.

Speaker 2

So all sort of within that kind of plusminus band, with the exception of like home furnishings, which had a larger.

Speaker 4

Yes. And that's no surprise. I mean, if you think about coming out of COVID, what do people do? They renovated their homes. They spent money in their homes.

Speaker 4

That's all they could do. And for 2 solid years, home furnishings led all categories in terms of sales comps. So it's not really a surprise to see that flatten out a little bit.

Speaker 8

Got it. And did you guys provide any cap rate?

Speaker 3

I also was going to say too, as you

Speaker 2

look at this, I know you're struggling, how does re leasing go up if you're doing 900 a square foot? But if you kind of listen to what I said about A, B, C, you've got really 50 yard line space where we know that that current tenant is kind of under what that space should generate. So it's kind of on the leasing team, hey, how do we demerchant that opportunity to put in a tenant that can perform from a cost of occupancy standpoint. And that's kind of nuanced difference of what we're talking about here. It's not just like, hey, sales are flat.

Speaker 2

We're just going to ask everybody for more rent. It's very specifically going into what I call premium zone space in our best centers and figuring out, hey, that person needs to go somewhere else. Now the negative to that is there's downtime. And so that is part of why we put together this plan that sort of does not rely on quarterly pressure because we're trying to we've got a target NOI that we know we need to achieve and we believe we've got the road map to do that. The other piece that's happening here is we don't have any subsidization of leasing for occupancy at Eddie properties for national portfolio deals.

Speaker 2

And that's something that day 1 when I got here, we started that. So we're going to get the best possible outcome for our non Eddie properties. And for the Eddie properties, just maintain occupancy as best we can without capital, and the team is doing that.

Speaker 8

Thanks, Jack. Did you one last thing, did you provide a cap rate on the Oaks? Sorry if I missed that.

Speaker 2

No, we didn't. I just say it's a 13% cap.

Speaker 8

Okay, great. Okay. Thank you.

Speaker 2

Yes, it's like $150,000,000 of debt on it and it's a $157,000,000 purchase price.

Operator

And our next question comes from Alexander Goldfarb with Piper Sandler. Your line is open.

Speaker 9

Hey, thank you and good morning out there. Scott, wish you the best. It's been great working with you and certainly appreciate the interactions over the years and welcome Dan aboard. I guess the first question, Scott, maybe just going back to the Pacific JV buyout. Just on the numbers, you mentioned $0.07 accretive, but you also mentioned some dilutive marks over the next few years due to the debt mark to market.

Speaker 9

So holistically, is it $0.07 total accretive inclusive of those dilution marks or it's $0.07 initially and then it's going to have dilution against that over the next few years?

Speaker 5

Yes, it's $0.07 excluding the impact of the debt mark to market and then I provided the incremental impact of that debt mark to market year by year just so you could see the burn off of that as we move forward. But $0.07 after the Washington taking into account, the accretive impact of the Washington Square refinance is the baseline measure. You'll just then tack on the incremental mark to market each year as I outlined.

Speaker 9

Okay. And then Jackson, you've been in there a while. You've announced some new malls that are for sale like The Oaks. As you look at the portfolio now, are there are you finding more malls that are, I guess, more Eddies, if you will? Or how are you shaking out as far as the portfolio that you ultimately want versus the Eddy's that you plan to sell?

Speaker 9

I'm just trying to understand if there are more Eddy's that you're finding or the other way around.

Speaker 2

I'd say it's sort of like there might be 1 or 2 more kind of on the cusp that are kind of in between that bottom steady Eddie and Eddie and kind of a lot of it is going to determine do we have a plan to sort of get that asset to be more thriving? And does the plan kind of make economic sense in terms of investment and things like that? So I would say like there's 2 on the cusp that sort of hold or kind of drop down. We're continuing to evaluate it. But look, we're trying to tighten up this company where we have effectively really powerful centers that can kind of drive demand and NOI growth like we're seeing at Tysons and Fashion Square, you keep reinventing those properties and they just keep doing more.

Speaker 2

And those are just great examples of properties and we have other properties like that. We're as we're going through these redevelopment plans and releasing plans and putting capital in where we think we can really drive share because the traders are there and sort of the competition around some of them are sort of fading. I'd say like Washington Square is a great example. We're really excited about that opportunity to take that asset up another level in terms of NOI contribution and just overall productivity.

Speaker 9

So the $2,000,000,000 that you referenced as the target, you could exceed that if you find these 2 assets and maybe others or that $2,000,000,000 is inclusive of what you're contemplating?

Speaker 2

No. The $2,000,000,000 is really is inclusive of the remaining eddies that are left. And like I said, we just got 40% of the way to go and we've got pretty good confidence on being able to get that done. So we feel like we'll get that $2,000,000,000 out of the way in relatively short period of time and we'll start focusing on the NOI bridge because that's really what you all should be thinking about once we give you the information.

Speaker 9

Okay. Thank you.

Speaker 2

Yes, we're very confident about the $2,000,000,000 at this point.

Operator

And the next question comes from Michael Mueller with JPMorgan. Your line is open.

Speaker 3

Yes, I guess for Scott, really appreciate having worked with you for the past 25 years or so as well. So look forward to staying in touch going forward. In terms of the question, Jack, just a high level one. Have you seen any notable changes in 3rd party capital's interest in traditional regional malls since you started this process earlier in the year?

Speaker 2

I think what I found was interesting is, look, the Oaks, we made a decision to sell the Oaks. That was one that was in our backyard. There were major redevelopment initiatives that we had studied in order to move forward. And we obviously made a decision to have that it's not it was ranked in Eddie. I think what's encouraging me is that the buyer of that asset has been able to secure debt for an asset like that, which is it's an asset that needs to sort of be reengineered, especially the retail.

Speaker 2

It's got a development opportunity that has entitlement, but there's still some moves that are required. But that buyer was seems to be able to have been able to secure financing, which I think is a really compelling opportunity for us as we look to monetize some of these other assets. They clearly that this buyer has the equity. They're at risk at this point. So that to me was encouraging.

Speaker 2

Look, pricing, there haven't been a lot of trades on enclosed centers. I'm excited about the 2 centers that long term we're going to keep at Washington Square and Lakewood. Those are and so I'm sorry, Cerritos. So I think there's more to come. I don't think there's a lot of transparency.

Speaker 2

There hasn't been a huge amount of A plus centers sold. But the fact that lenders are coming into what I call B opportunities or maybe properties that could become A's that need a lot of reconstruction, that to me is kind of encouraging. That wasn't really the that wasn't as evident in when I first started the company in March of this year.

Speaker 3

Got it. Okay. That was it. Thank you.

Operator

And our next question comes from Linda Tsai with Jefferies. Your line is open.

Speaker 3

Thank you, Scott. Thank you as well and I wish you the best. The acquisition cap rate of 7.2% to 7.4% for buying the centers that you want to own in their entirety, does that cap rate stay in that zip code as you continue to buy out your better assets? Or would you expect it to compress as stabilization, you referred to continues?

Speaker 2

I think it's probably going to compress. It's just look, the business is really good. So it's sort of why Open Air Center trades way inside of an enclosed mall when there's so much leasing and demand for space and NOI growth sort of surprised me. But yes, I would say as we kind of look forward in new deals, my guess is they're going to continue to compress over time just because the growth rate is there as we look at IRRs for these kinds of investments.

Speaker 3

And then Jack, when you look at your portfolio today, what does the future portfolio have to look like? And what are the market conditions you're looking for that would make you effectuate a sale of Macerich?

Speaker 2

Well, I didn't want to sell, I just got here. Well, look, I'm kind of really go sell me, Rishi. I mean, and of course, look, we as a public executive board, we all have to evaluate those kinds of scenarios or strategies. But I believe that one of the things that was so attractive about this opportunity, there's not many competitors in the public REIT sector that do what we do. And what we do is pretty unique.

Speaker 2

Not everyone can do it well in terms of being able to lease and operate, these type of properties on a national basis. I'm actually quite optimistic about I think about some of the properties are going to go back to our lenders. What's going to happen to those? Are they going to sit with the servicer for a while? Eventually, these are going to come back around and be really interesting opportunities if you can enter in at a much lower basis.

Speaker 2

And I believe that, that is going to be an opportunity for those that can do this type of business. And so my plan is to try to position Matrix to take advantage of that opportunity. And so yes, we're going to continue to tighten this portfolio up, clean it up, clean its balance sheet, clean up our processes. And if we're fortunate enough to get a competitive cost of capital, we'll try to use it if we can deploy in ways that are accretive. But yes, so that's what we're doing.

Speaker 3

Thanks.

Operator

And the next question comes from Caitlin Burrows with Goldman Sachs. Your line is open.

Speaker 10

Hi, good morning, good afternoon, everyone. I guess maybe the answer might be that you're not so worried about specific quarters right now. But with leasing as strong as it has been for multiple years now, I guess it is somewhat surprising that occupancy hasn't been increasing more. So I was wondering if you could talk through what you think some of the reasons why that upside has been limited, like occupancy was up 30 basis points year over year. So do you think that can accelerate?

Speaker 10

Or might there be other headwinds from Forever 21 like you mentioned or others that kind of keep it in that range?

Speaker 2

I mean, pick Forever 2021 out. I would just say kind of as a new person coming in, we were probably very focused on quarter to quarter annual budgeting kind of strategy. I will tell you that our occupancy rate will go up as what we're part of what we're doing. I can if we're successful in the execution of our ABC, we've kind of got the spaces, we know where they are. There's an acute focus on getting that stuff done.

Speaker 2

The byproduct of that and we're and Doug has talked to you about renewals. We're way, way ahead of renewals. If we do what we just said, our permanent occupancy will go up, okay? It just will. And I think that I could see if you were sort of focusing on annual budgets quarter to quarter, you're maybe not as focused on really attacking what I call those opportunities to really drive up permanent occupancy.

Speaker 2

And so we know everyone on the team knows what it is. And this is not the first time my company has served 24 months and they know what to do and we're going to get after it every day. So you'll see it go up. That's how you make permanent occupancy go up.

Speaker 10

Got it. Okay. And then maybe kind of along the lines on what's today like a quarterly focus versus a long term focus. I realize FFO and AFFO per share are not the near term focus. But given the direction they've been going and I know the dividend is a Board decision, wondering if you could talk about the dividend, how your payout ratio today compares to where you want it to be and if you think the dividend is at a good spot?

Speaker 3

Well, I mean, look, I think

Speaker 2

I've said before, we're not going to put guidance out for next year either. We're going to probably the Board, I think, is comfortable keeping the payout of the dividend at its current level because that's our best source of cash flow as we reinvest kind of back into the portfolio, especially on this leasing initiative I just talked about, and some of the select developments that we're pursuing. Look, we my goal is to get to that $1.80 or higher and start to actually increase our dividend payout ratio, commensurate with an ability to actually grow the business on a very steady basis, not having sort of over levered balance sheet or pressure and things like that. So we will do that in time, but probably for the next period of time as we go through this execution, my guess is not the Board decision. It will probably stay kind of in its current position.

Operator

Thanks. And our next question comes from Haendel St. Juste with Mizuho. Your line is open.

Speaker 11

Hey there. Good morning. Scott, it's been a pleasure. All the best. And then look forward to working with you again.

Speaker 11

So Jackson, Jack, you previously outlined a 4 year timeline getting to FFO $1.80 by year 4, getting your leverage down, but certainly seems like things are moving at a far quicker pace. As you've indicated several times on this call, you're moving at a breakneck speed. I think we're all curious kind of is this still a 4 year process? Can you in fact get there sooner as it seems? Is it more of a 3 year process?

Speaker 11

And I might have misheard, but it sounds like you don't expect to provide FFO guide next year. When should we expect that? Is that maybe year after next? So some color context there. Thanks.

Speaker 2

I'd say probably the year after that would be kind of a reasonable period. I think this NOI bridge that we provide you all, as I said, is going to be very, very valuable. We have it internally. I think that's going to be very valuable because you can benchmark what we're doing. I would say that as we start to be able to get disclosure like Scott went through, I know it's pretty painful as we went through it.

Speaker 2

The Washington the PPRT accretion and dilution because of the mark to market debt. And then we've got this issue of being able to give properties back like Santa Monica, we're still on title, we're still managing the asset, still going to be there probably until later next year. So there are some just structural things that will take the next 1 to 2 years. We may well be finished with the plan in the following year where we you'll see, yes, they're finished based on the NOI bridges that we show you. It just will take those several months for things to kind of clean up your earnings.

Speaker 2

But my hope is we're able to kind of through select disclosure, provide you the tools to be able to give you confidence that we're contractually there, if that makes sense. Once we start to outline more assets, more eddies, which we plan to do, more NOI bridge, more progress on this ABC stuff, you're going to see it and you'll say, okay, absent some major credit loss, these guys are getting there. And just a question of at what period.

Speaker 11

That's helpful. That's helpful. And then within that, just thinking about kind of this the broader the bridge over the next couple of years with FFO. I think a lot of us were through our modeling process, assuming that FFO would bottom somewhere perhaps in the $1.50 ish range, is that next year or the year after, who knows, but curious if that's a reasonable expectation, and then in fact, if that could be something that is perhaps in that year 3 of this plan as well? Thanks.

Speaker 5

Yes. Ron, I'll just say, by the way, yes, thank you for the excuse me, Haendel, sorry. Thank you for the commentary, Brian, and thank you everybody for the commentary upfront. We've very deliberately provided a kind of a 4 year vision again because of all these various factors. It's very hard to predict when some of these assets are going to be rolling off the portfolio as we give assets back to lenders.

Speaker 5

Things like acquiring JV interest where you've got this interim disruption to earnings from the non cash marks. Those are all elements that why we pulled guidance and why we gave you a 4 year vision that we think we can hit. So I really don't want to box us in. I don't think that would do our plan justice to provide an estimate, an interim estimate for you. You.

Speaker 5

At this point in time, we do feel that we're ahead of pace on refinancings, which gives us a little bit of room and a little bit of latitude to make other decisions in the plan. We think we're tracking very well in terms of our NOI execution, details to follow soon. And the disposition plan is shaping up and the estimate the pricing estimates that we had in the disposition plan are on target. So all those levers seem to be moving in the right direction. And in fact, I think we've got a little bit of latitude there.

Speaker 5

But in our remarks, it's just not going to do us justice to give that to you. It's going to be frankly relatively hard to predict.

Speaker 11

Fair enough. I'll have to try it. Thank you.

Speaker 5

Yes. Thanks, Haendel.

Operator

I would now like to turn it back over to Jack Shae for closing remarks.

Speaker 2

Great. Thank you. So at NAREIT, Dan will be out at NAREIT, so you all get a chance to visit with him. And I just want to go ahead and once again, thanks Scott. He's been an outstanding professional as it relates to dealing with this transition and we all owe him a debt of gratitude.

Speaker 2

So thank you very much. Thank you, John.

Speaker 5

Thank you, everybody.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Macerich Q3 2024
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