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Macerich Company (The)
2/27/2025
Ladies and gentlemen, thank you for standing by. Welcome to the fourth quarter 2024 Mace Rich 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 this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Samantha Greening, Director of Investor Relations. Please go ahead.
Thank you for joining us on our fourth quarter 2024 earnings call. During this call, we'll 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, and 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 8K with SEC, which is posted on the investor section of the company's website at macerich.com. Joining us today are Jack Shea, President and Chief Executive Officer, Dan Swanstrom, Senior Executive Vice President and Chief Financial Officer, and Doug Healy, Senior Executive Vice President of Leasing. And with us in the room, we have Brad Miller, SVP of Portfolio Management. And with that, I turn the call over to Jack.
Thank you, Samantha, and good afternoon. Over the last year since joining Mace Rich, I have become increasingly confident in our mission to operate and own thriving retail centers that bring our communities together and create long-term value for our shareholders, partners, and customers. We launched Mace Rich's path forward early in my tenure, and I'm pleased with our steady progress. This clear, executable plan is designed to accomplish three key objectives over its five-year horizon. One, simplify the business. Two, improve operational performance. And three, reduce leverage. During 2024, we were successful in simplifying our business through selectively consolidating joint venture interests at Arrowhead Town Center, South Plains, Los Cerritos, Washington Square, and Lakewood. Our equity offering in late 2024 de-risked that portion of our plan, and the refinancing of Queens Center is well below our target refinancing rate. We're well underway on loan givebacks and mall sales and are now focused on out parcel, land, and select open-air retail sale opportunities around our shopping centers. A big focus of mine has been to improve internal processes and restructure many aspects of our approach to asset management, leasing, property management, portfolio management, and development, which will best position the company to drive improved operational performance and to deliver long-term value creation. I'm pleased with the progress on several key initiatives to date Our Process Improvement Committee has been successful in implementing a new leasing dashboard tool whereby leasing, asset management, legal, tenant coordination, construction, and senior leadership all collaborate seamlessly together, which has vastly improved our visibility and efficiency around leasing and tenant coordination. Our asset management and portfolio management teams are now a standalone group whose mission is to be the asset owner at Mace Rich, responsible for driving cash flow and long-term value through operations, utilizing our leasing, development, and property operations teams. Our asset and portfolio management teams led the effort to create five-year Argus business plans for each asset, which is now a bedrock tool that we use to evaluate leasing and capital decisions. The permanent specialty and department store leasing teams are all now under one leadership and reporting structure. Property operations, marketing, and development are also under a new leadership structure. Working collectively with our asset management, portfolio management, and leasing teams, we have ranked all tenant spaces throughout our portfolio with an A through F grade and determine market rents for each particular space. An important aspect of our path forward plan is to take advantage of driving more incremental revenue out of our portfolio through leasing vacant, temporary leased, and under market A and B and C rated spaces within our portfolio. Each of these organizational process, analytical, and technological enhancements provide our team with the strategic roadmap and tools to drive leasing and NOI over a multi-year horizon. With respect to the NOI component, our leasing team is hyper-focused on what needs to get done in the next two years. To help frame the leasing initiative, in 2023 and 2024, we averaged approximately 3.75 million square feet of annual lease volume. We are targeting an average of 4 million square feet of leasing in 2025 and 2026, and focusing on creating a higher percentage of new lease deals versus renewals in our annual mix of business. New deals contribute vastly to our releasing spreads and incremental rental revenue. The effect of this shift and mix is new deals typically involve more rental revenue downtime in the range of 12 to 18 months. In 2024, we achieved 8.8% base rent releasing spreads for permanent tenants under 10,000 square feet. New leases signed during this period were 17.6% higher base rent versus the prior period permanent rent. Including vacant and temporary lease space to the aforementioned group of spaces, the releasing base rent percentage increase was over 50%. Our current physical permanent occupancy for our Go Forward portfolio is 84%. We are targeting an 89% physical permanent occupancy rate by 2028. Approximately 50% of this increase is already accounted for by our current snow pipeline of $66 million. Having the ability to forecast the longer-term impact of this change in leasing mix coupled with continued strong leasing demand is an excellent setup for us to achieve our incremental NOI goals for 2028. We are being very intentional in our decisions to optimizing lease outcomes and rental revenue uplift within our portfolio that aligns with our strategic financial objectives for 2028 under the path forward plan. This is a massive change in mindset and operations for the company, which has historically been more focused on managing the business to annual near-term FFO targets. There is a compelling opportunity to get after under market and vacant A, B, and C rated spaces in our centers. Maximizing each space and their total revenue potential over the long term will result in a higher volume of tenant re-merchandising, space movements, and temporary downtime in rental revenue. To recap, I feel very good about how things are progressing on our path forward plan. We've made substantial progress to date. We have a clear roadmap with tools and new processes for leasing over the next 18 to 24 months and beyond, which will drive incremental rental revenue and a more improved and resilient permanently occupied portfolio. We are currently 39 percent complete in our leasing goals towards our plan. Our asset givebacks to lenders will play out over the next two years as loan maturity dates trigger on any properties. We have an identified group of out parcel land and malls that the team are executing sale transactions. which will continue over the next three years. And we are currently funding our development pipeline, which will contribute NOI in 2026 through 2028. With that, I'll turn the call over to Doug.
Thanks, Jack. We had another solid quarter, and year for that matter, both in terms of leasing volumes and metrics. Sales per square foot at the end of the fourth quarter were $837, and this is up $3 compared to the last quarter. Sales per square foot, excluding our eddy properties, were $915. Comparative sales for the fourth quarter and for the year were basically flat when compared to the same period in 2023. As I've stated in the past, we have yet to see a correlation between sales and retailer demand as evidenced by our deal flow, both in terms of number of deals and square footage when compared to the same period last year. And I'll get into this more in a moment. Traffic for the year was up almost 2% when compared to 2023. Most importantly, the portfolio traffic is back to our pre-COVID levels. Occupancy in the fourth quarter was 94.1%. This is up 40 basis points from the third quarter and up 60 basis points from a year ago. Portfolio occupancy, excluding our eddy properties, was 95.8%. In the fourth quarter we opened 530,000 square feet of new stores. This brings our total for 2024 to 1.5 million square feet of new store openings, which is just about on par with where we ended up in 2023. Now let's take a look at the new and renewal leases that we signed in the fourth quarter. In the fourth quarter we signed 223 leases for 1.1 million square feet. For the full year 2024, we signed leases for 3.7 million square feet, which is just about where we ended up in 2023. And let's keep in mind, 2023 was a record leasing year for us, dating back 30 years when Mace Ridge first became a public company. 2024 was also another year of newness for us. Once again, bringing new, unique, and emerging brands was a major initiative for our leasing team. and a way for us to really reimagine and differentiate our shopping centers from our competition. To that end, in 2024, we ended up with commitments on nearly 430,000 square feet of new to Mace Rich brands. Examples include Helly Hansen, Princess Polly, Mejuri, Carhartt, Seafood City, Akira, Rivian, Buck Mason, Celine, Pop Mart, and Mendocino Farms, just to name a few. So once again, a very solid volume of leases signed in 2024. However, that's what we've done in the past. I like to focus on the future in our current leasing velocity. And as I've said before, at Maestrich, we review deals every two weeks. And year to date in 2025, we've reviewed 55% more deals than we did during the same period last year. But most importantly, we reviewed three times the new deals and over five times the new deal square footage than we did during the same period last year. And once these deals are reviewed and approved, they go to lease, get signed, and eventually become part of our sign not open pipeline. I realize it's early in the year, but these statistics are very encouraging and indicative of the healthy retailer environment that exists today. So far, neither sales nor the macroeconomic environment seem to have had any effect on retailer demand. I also believe this is a testament to Mace Rich's must-have portfolio. Turning to our lease expirations, to date we have commitments on 63% of our 2025 expiring square footage that is expected to renew and not close, with another 21% in the letter of intent stage. So between commitments and LOIs, we're just about 84% done with our 2025 lease expirations. In the fourth quarter, we had only four tenants in our portfolio file bankruptcy. In all of 2024, we had just 13 tenants in our portfolio file bankruptcy, totaling only 54 stores, 26 of which were the express bankruptcy. And of the 26 express stores that we had in our portfolio, Only nine closed, and of that nine, we have commitments or are negotiating LOIs on 75% of that closed square footage. Turning to our signed not open pipeline, at the end of the fourth quarter, we had 104 leases signed for 1.2 million square feet of new stores, which we expect to open between now and into early 2028. In addition to these signed leases, We're currently negotiating leases for stores totaling just under 875,000 square feet, which will also open during the remainder of 2025 and into 2026, 2027, and early 2028. So in total, that's over 2 million square feet of new store openings throughout the remainder of this year and beyond. And this pipeline of new store openings now accounts for $66 million of incremental rent, of which $27 million will be realized in 2025, with the remainder being realized between 2026 and into early 2028. And with that, I'll turn the call over to Dan to go through our fourth quarter and year-end financial results.
Thanks, Doug, and good afternoon. I'm pleased to be participating in my first earnings call with the Macerich team. I'll start with a review of fourth quarter financial results. FFO excluding financing expense in connection with Chandler Freehold, gain on extinguishment of debt, accrued default interest expense, and loss on non-real estate investments was approximately 117 million, or 47 cents per share, during the fourth quarter of 24, as compared to approximately 128 million, or $0.57 per share for the fourth quarter of 2023. The primary drivers of the $11 million decrease in FFO include higher interest expense and then the severance expense incurred in the fourth quarter of 2024. $7 million of the increase in interest expense relates to the amortization of debt mark-to-market resulting from our various JV interest acquisitions. This non-cash expense is included in interest expense on our P&L. Severance expense for the quarter was approximately $5 million and is included in management company's operating expenses on our P&L. I would note that as it relates to the amortization of the debt marks to market resulting from the JD buyouts, we expect this to have an incremental $0.09 per share reduction to 2025 FFO adjusted as compared to 2024 all else equal. This reflects a full year impact in 2025. versus the partial year impact in 2024 when we acquired these JV interests. As a reminder, these are non-cash interest expense items, and they roll off the P&L by 2027 as the various loans mature. Same Center NOI excluding lease termination income decreased 0.4% in the fourth quarter of 2024 compared to the fourth quarter of 2023. And for the full year ended 2024, Same Center NOI including lease termination, increased 0.2% compared to 2023. Adjusting for the negative impact of the express bankruptcy, same center NOI growth would be about 1% year over year. Excluding any assets, this adjusted 1% growth would increase to 2.1% for the year. Turning to the balance sheet, we made considerable progress in 2024 managing our debt maturities. closed on seven transactions for over $1.3 billion of loans, or $1.1 billion at our share. During the fourth quarter, we closed on a five-year refinance of Queen Center at an attractive fixed interest rate of 5.4%. We just recently paid down the approximately $15 million MED loan, or about $7.5 million at our share, on Flatiron and Crossin that carried a high interest rate of so far plus 12.25%. For the balance of 2025, we have less than $300 million net share of maturing loans, and we've already started to address our 2026 debt maturities with the repayment of two loans, Washington Square and the Oaks. We'll provide further updates on our debt maturities as we move through 2025. We currently have approximately $683 million of liquidity, including $540 million of capacity on our line of credit. From a leverage perspective, I'm pleased to report that debt to EBITDA at year end 2024 was slightly below eight times, which is almost a full turn lower than one year ago. And we've outlined our strategy to further reduce leverage to the low to mid six times range over the next several years. We continue to make significant progress in executing the path forward plan. In October, as previously announced, we closed on the acquisition of our partner's 40% interest in the PPRT portfolio. The net acquisition price was $122 million, and we assumed our partner share of debt outstanding. We now own 100% of Los Cerritos, Washington Square, and Lakewood. This transaction is consistent with our stated objective to proactively consolidate select joint ventures and to simplify the business. In November, the company priced an underwritten public offering of 23 million shares of common stock at a price to the public of $19.75 per share. for gross proceeds of approximately $454 million. We used the net proceeds from this upsized offering together with cash on hand to repay the $478 million Washington Square mortgage loan that had an interest rate of so far plus 400 bps and that had a 2026 maturity. This transaction is consistent with our stated multi-pronged strategy to reduce leverage and improve the balance sheet. In December, we closed on the sale of the Oaks for 157 million. We used the net proceeds from this sale to repay the $148 million loan on this property that had an effective interest rate of approximately 7.75%, and that had a 2026 maturity. We also closed on the sale of Southridge for net proceeds of 4 million, and we are currently under contract to sell Wilton Mall for 25 million, which is expected to close in the first half of 2025 subject to customary closing conditions. This asset is unencumbered. These sales transactions are consistent with our stated disposition plan to improve the balance sheet and refine our portfolio. To recap on the Path Forward plan's significant progress to date, on our three key pillars to reduce leverage, one, Jack provided commentary on the NOI growth component and the roadmap for the team over the next two years to execute on this prong of the leverage reduction plan. Two, we have achieved the equity issuance component of the plan. And three, we have made substantial progress on the sales and givebacks component of the plan and have identified a clear path to achieving our $2 billion disposition target. To date, we have completed almost $800 million. This includes Country Club Plaza, Biltmore, the Oaks, and Southridge, which are closed, Santa Monica Place, in which the loan encumbering this property is in default, Wilton, which is under contract, and Atlas Park, which is currently being marketed for sale. And then we have identified internally four assets totaling about $350 to $400 million for sale or give back over the next one to two years. That brings us to almost 60% of our $2 billion targets. The remaining 40% of the plan includes the planned sale of one enclosed mall over the next year and the sale of $500 million of out parcels, freestanding retail, non-enclosed mall assets, and land. On the $500 million, we expect to close 100 to 150 million of sales in 2025, which we anticipate will be more weighted towards the second half of the year And then we expect the balance of the $500 million in sales to close in 2026 into the first half of 2027. We'll provide further updates on these sales as we progress through the year. With that, we'll turn the call back over to the operator.
Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again And please limit to one question and one follow-up. One moment for our first question. And the first question will come from Floris Van Ditcham with Compass Point. Your line is open.
Hey, thanks, guys. So a couple of questions. Let me start with... Same-store NOI. I know you haven't given any guidance, but if I look at the SNO that's going to hit in 25, Dan, I think it's around 27 million of the 66 existing pipeline that you've outlined, that would appear to be 3% growth. I guess it depends a little bit on the timing of that, but again, with the fixed rent bumps, et cetera, it seems like your same-store NOI growth in 2025 is going to be significantly improved over 2024. Am I missing something?
Hey, Floris. This is Jackson. I'll take this first. So, you know, I tried to give reference around the totality of new leasing that's happening and the frictional downtime when When we either take out a temporary tenant or a leased permanent and revise upwards for a better tenant, it's going to pay more rent. That's basically a loss of rental revenue. Now, that's offset by renewals and the timing of the snow pipeline coming through. The way we've modeled this, it's going to be candidly more flat for the next couple years and then stair-step up in 27 and 28. given the profile of how this is all going to model out. So when I look at same-store NOI and, candidly, FFO over the next couple of years, that's not going to give you the real answer on our progress. And what really will start to show progress is, you know, I mentioned 39% of our leasing goals that relate to cost of occupancy or rent are achieved. We'll give updates as we move along, but as that percentage goes up, you should have confidence that all that rent will start to come online as it churns through the vacant temporary lease and what I call low-performing permanent tenants that we have targeted to take out of the portfolio.
So, Jack, just to clarify, I think you've indicated that you've got about 17% or 18% spreads on your new leases. And you're, you know, presumably, does that also mean that if you're assigning those new leases at similar occupancy cost ratios as your existing rents, that sales on those new leases are going to be, you know, call it 18 to 20% higher than your existing portfolio? Should we start to see some of that filtered through in your sales numbers in the portfolio?
I think you'll see it. Well, first of all, too, I referenced that 50% number. So that includes, you know, for tenants under 10,000 square feet, where there's obviously a big opportunity for leasing. If you include vacant, temp tenants, and perm through 2024, that releasing spread was over 50%. We have a meaningful amount of vacant and temp A, B, and C class rated space in our portfolio. You're probably asking, like, how did we get that? Well, if you're running a company based on annual budgeting targets and not looking out on how leasing impacts, you know, forward future performance, that's how you get there. You'll get, you know, you'll bump along at 3% to 4%. You're going to keep, you know, your temporary tenant percentage will not go down because you want to keep that rent in place. you'll probably keep tenants that are less desirable permanent tenants in place. Um, and we've got opportunity in our better centers just to, to kind of redo that. And that's where, you know, I talk about this higher percentage of mix. Um, now the net result of that, you may see some quarters where it goes up, but it also may go down and, you know, but this portion of the plan, you know, it's, um, It's almost like we're treating it like we're a private company because there's a big opportunity to capture a meaningful spread of rental revenue if we do this. We haven't provided the details of it, which we plan to lay out later this year in this NOI bridge, but it's a pretty compelling opportunity, and the result of it is going to be more noisy, same-store NOI, and probably FFO from period to period.
Let me ask my second question, if you don't mind. As I'm looking at, obviously, you still have some expensive debt, in particular, South Plains at almost 8%. I don't know whether you're going to keep that one or not, but you've got a really attractive development pipeline, Green Acres, with, I think, 13% returns. That's $130 million, if I'm not mistaken. And then Scottsdale, 17% returns on that. wouldn't it make sense to fund all of that with equity, including the debt pay down, simply because it's accretive relative to the 7.1% implied cap rate you're trading on? Or how do you think about that? Or are there other opportunities that you see where that might make sense?
I mean, you could choose to do that. It's obviously mathematically accretive to issue equity to fund that. But, you know, at this point, you know, our concept on issuing equity is, If the opportunity arises where we can consolidate a JV or there's some other accretive use that could be paying down development pipeline with equity, buying a property, something like that. But outside something like that, we feel like we've got the equity needs in place. We've got enough free cash flow to execute the plan after dividends and interest. Yeah, but you're right. It would be mathematically accretive to use equity to finance the development pipeline. Long-term accretive.
And the next question will come from Craig Mailman with Citi. Your line is open.
Hey, good afternoon. Jack, you just touched on the new dashboard and you know, having five-year Argus runs now, kind of the better process put in place. Is there any early kind of quantification of how that's helping you from, you know, the more efficient process turning into, you know, less costs on legal or quicker gestation periods, kind of anything around that that would be helpful to get some tangible? Okay.
Hey, thanks, Greg. Well, some of the comments that Doug talked about, what we've seen year to date, I think that's partially the environment, but it's partially us having the tools to know what space to go after and how to do it. When I first got here a year ago, When I went to review a lot of properties, did on-site visits, one of the consistent themes that I had heard from our leasing team, every time I went to a new property, met with the leasing team, asset management, development, on-site manager, kept hearing it time and time again. The leasing team spent so much time in the rebudgeting process that this company did, which was typically three times a year. There were three rebudgeting forecasts throughout the year. And the amount of time that it took for them to stop what they were doing, re-forecast their pipeline, apply new market rents to different spaces they were focused on, took up a lot of time. The second thing that took up a lot of time was there was no system at the company to communicate the current status of discussions with tenants, which kind of shocked me. So everyone had their own spreadsheet, their own lists. And there were hours and hours spent by people on conference calls trying to update national tenants across our regions where people are located in terms of the leasing team. And so when you couple like the reforecasting coupled with the lack of visibility, there were thousands of man hours at Mace Ridge were spent on things that were not driving future revenue opportunity. If you fast forward today, this leasing dashboard is effectively a CRM for us. And so at any given time, Doug, myself, Brad can pull up or an asset manager can find out a space that's designated to a leasing rep, where that last conversation was, what the target rent was. And that tenant can be seen by everyone in that conversation, everyone in the company, whether it's tenant coordination, asset management, legal. And we've got a quarterly review process now where it's really driven by asset management, where they can basically go through a leasing plan and look at space C10. The last comment on that was like three months ago. Well, that's really not going to be very effective if we're targeting C10 to be leased on time over the next two years. The result of all this is I think there's tremendous efficiency. It's creating more opportunity for boots on the ground to achieve, you know, these targets that we're looking for. And, you know, I mean, Brad, you've been here for a long time, but he's in portfolio. You know, you're the architect of a lot of the old process. Tell me what you think.
Yeah, efficiency-wise. So, right, you know, going from an annual budget process of having annual lease goals and revisiting those annual goals three times a year, to now having a five-year plan where we get visibility into the leasing progress really on a daily basis and the shifting of resources is producing results. I mean, as Doug mentioned, it's early innings this year, but we're seeing good progress and we know exactly where we need to be and the 39% completed to us on track to hit our goals.
That's helpful. Then maybe the follow-up. You guys are effectively raising your annual leasing goal by about 250,000 square feet. How much of that is your capacity kind of improvement now that you have some of these processes in place versus just the amount of demand that you're seeing and the ability to get some of that through the door?
Hey, Greg, it's Doug. I'll take that one. Yeah, we're obviously benefiting from a healthy retailer environment that has persisted really over the last couple of years, and we don't see any change to that in the near future. So that's a huge tailwind for us. But in terms of the processes that Jack and Brad were just talking about, we have a very clear path to where we need to be in the end of 2028 and in my world we need to be where we need to be by the end of probably 2027 to get that um or 2026 excuse me to get all that revenue online by 2028 so you know we've done a few things internally and i won't get into the nitty-gritty but jack did allude to it we've brought all uh anchor store leasing and all specialty leasing under one roof so Whereas before there were sort of silos set up. Now all revenue is coming under me and My permanent leasing people are working with our specialty leasing people, are working with our department store people to make sure we get to that end goal in 2028. And I think one of the most important things we've done, and Jack talked a little bit about this, is we're laser focused on permanent leasing. Not to say we're not focused on specialty leasing, we can't let that go, but we've got a bunch of specialty leasing people on site that do nothing but fill space temporarily. So the fact that they're now in our world, they're acting more like permanent leasing people. So while their focus is still on specialty, in their mind, they're aligned with permanent leasing goals, which means where we need to be by 2028. So it's those little things that we've done internally, I think, account for this velocity that I alluded to earlier in my opening remarks. Great. Thank you.
And the next question comes from Linda Sywood Jeffries. Your line is open.
Hi. Thanks for taking my question. Jack, appreciate the systematic rigor you're proliferating at Maastricht. I know you introduced the same types of processes at Spirit, too. My question is, FNO is a percentage of NOI. How should we think about the growth rate in 25 versus 24 and 26 versus 25s?
Hey, Linda, it's Dan. We had outlined in terms of the total S&O for 2025 is, again, taking a step back, of the $66 million of snow, 2025 would be $27 million of that $66 million. And what was the second part of your question in comparison to what?
Oh, I was just trying to think about it like, SNO as a percentage of NOI and what those growth rates could look like, you know, how much that grew in 24 versus 23, 25 versus 24, 26 versus 25?
I mean, I would say, Linda, here's how I think about it. Rather than give you a percentage, you know, an important part, you know, I've mentioned to you like this mix of more new versus renewal. You know, if you looked at our historical five-year average of tenants under 10,000 square feet, typically that ratio is about 34% new leases versus renewals over that five-year period. In 25 and 26, we're targeting 45% new tenants in our game plan. So that's going to automatically obviously increase the snow pipeline substantially if we're able to accomplish this, which we believe we are. So I don't think it's going to have – it's going to be quite different than historical because it's very intentional about attacking vacant – I'll call it nonproductive A tenants that can be upgraded, some under market, some temp. There was a surprising amount of opportunity within our 20-yard lines of the main mall where it's just like, why do we keep these tenants here? Why are they here? Well, we're focused on annual FFO targets and budgets and reforecasting. We can't kick them out. It's the wrong thing to do for the center. And we can get and make more money. So if you think about what we're trying to solve for in 2028, If we do what we say, we're going to end up with a much more resilient, permanently occupied portfolio with strong, vibrant tenants. You know, that's the result of this. And, you know, we can have better merchandising mix, which will drive traffic. We can get rid of some of the legacy tenants that are candidly not performing well or at risk, which is something that was harder to do under the way we used to do things, which were kind of within the annual period. So to answer your question, the snow is going to go up. As we kind of crank through this, you know, we can already see it. And eventually with the 12 to 18 months downtime, you know, that will come in on time for our purpose, you know, 2028.
Thanks. And then what's the spread difference between the new rents and the renewals?
You know, so for under, you know, for under 10,000 square foot, you know, it's, you know, that 8.8%, you know, versus 17. So, you know, I think the, what would be the renewals? 8%? Is that right? 5.8%. 5.8%, sorry. But once again, well, once again, you know, mix has a huge, you know, variance to these numbers, the mix. And we'll start to disclose going forward much more detail about leasing mix because you obviously need it. If I just give you 8.8, that doesn't really tell you too much. So we'll start to give you more details as we move forward at the end of the first quarter on the mix that we're talking about. I think it'll be helpful for you.
Thanks. Just one last follow-up related to that. In leasing up the A, B, and C space that you didn't focus on previously, what's the weighting of those spaces, like percentage of A versus B and C, and then are you able to turn C spaces into Bs and B spaces into As?
It's less about – I'll let you go, Brad. Sure. I mean, like, in our plan, in our go-forward plan, 90% of our leasing activity is on A, B, and C spaces. So we're still – it's still strong spaces where there's tenant demand to lease these up in our plan.
Thanks.
And the next question will come from Jeffrey Spector with Bank of America Securities. Your line is open.
Hi, this is Andrew Real on for Jeff. Thanks for taking our questions. Just on the consumer, last quarter you pointed to this shift in discretionary spend away from goods and more into services. Just wondering if you've seen any capitulation back towards goods-oriented spend and what your overall thoughts are on the outlook for discretionary retail in 2025. Yeah.
Hey, Andrew. It's Doug. It's a great question. And I did talk about that. You know, coming out of COVID, everybody was, you know, buying things. I mean, they were remodeling their homes. They were buying shoes. They were buying apparel. All stuff that they couldn't do for, you know, 18 months. And that's why we saw, you know, huge comp sales across our portfolio over the last two and a half years. But you're right. I did talk about the fact that consumer behavior was changing. And it was. It was, you know, people for the first time felt more comfortable to socialize. They felt more comfortable to go on vacation, to go on cruises, to go to concerts. And we're still seeing that. But now you think about it. This has probably been going on for the last 18 months, 18 months, say. Now it's time for replacement. So I think the key word on a go-forward basis is replacement and replacing those products that were bought coming out of COVID. And that's what we saw in the fourth quarter, for sure. In November and December, that's when we started topping up. But I think, you know, that's sort of the buzzword around the industry right now is replacement. So I think you're going to see that all cycle back to a little bit more of normality.
Okay, thanks. And then just a quick follow-up. Of the 2025 expirations, I think you said in your remarks 84% of those spaces are now committed or under LOI. Just curious, how does that compare to this time last year? Thanks.
Just a little bit ahead of where we were last year.
Okay, thank you.
And the next question will come from Steve Sacqua with Evercore. Your line is open.
Thanks. This is Manas on for Steve. It looks like you're making some really good progress on all fronts for the path forward. Are there any areas, Jack, that you feel like are slower than what you would have expected now that we sit here from the point of being in February of 25th? And maybe if you could touch on what you believe maybe is the biggest risk going into 25 that could impact the execution of the path forward, like the first question.
Yeah, but I'd say we're very comfortable with the range, you know, debt to EBITDA and the earnings ranges we put out, you know, last year for the plan after going through the detailed business plans. I think one of the things that came out of the Argus exercise was that the anticipated landlord work and ta costs were were higher given the percentage of new tenants we were focused on um so that was one area that you know was probably more of a negative surprise for us um we've obviously had a lot of positive surprise as well you know the equity the the refinancings and some of the sales um the other is you know one one area that could you know, be a negative for us or a headwind is if there's any delay in our development pipeline. So, you know, at Green Acres, we're on track. You know, Nordstrom's is on track. There is some delay at Flatiron, so we're trying to move, continue to move forward in that project as quickly as we can. But absent that, you know, we have a very clear idea of what we need to accomplish. And we feel like we've This management reorganization and people reorientation with the systems, it's quite staggering how big of an impact this is having around versus the past. So I'm confident in what we can do, and we're just going to get it. We're just getting after it.
That's perfect. I appreciate that. And it's actually perfectly translating into my second question, which was going to be on CapEx. You just mentioned that based out of these Argus run exercises, it looks like that is maybe trending higher. So I just wanted to clarify, is that maybe now essentially transcending in CapEx for 25 as a percentage of NY or however you want to base it off, potentially trending higher than previously anticipated or higher compared to 24? Any color there would be super helpful.
I mean, hopefully we can beat those assumptions, you know, because they're just assumptions right now. But if we're able to achieve the level of velocity that we talked about, 4 million square feet, 45% new, under 10,000 square foot tenants, that's going to incur theoretically more capital costs than 25 and 26 versus historical, because we're running at higher volumes and a percentage of new tenants versus renewals.
Yeah, I would just add relative to the initial plan to Jack's point, it's a little bit more near-term 25 and 26 spend, but then it levels off in 27 and 28 versus more of a smooth spend over the four years.
Perfect. That's funny. Thank you.
The next question comes from Vince Tybone with Green Street. Your line is open.
Hi, thanks for taking my question. For the $400 million of planned lender malls that Dan mentioned earlier, what is the current weighted average debt yield on those assets just to help from an FFO perspective? And then also on the $500 million of potential dispositions, how should we think about the quality, potentially cap rates on those, you know, more selective dispositions? Is it fair to assume it's going to be more eddy properties in addition to some, you know, freestanding, as you mentioned? But Any color there to help FFO modeling would be helpful.
And Vince, on the second part, you're asking specifically about the $500 million up sales? Yes, that's what I was referencing, yes. Yeah, so those are more out parcels, freestanding retail, land parcels, and not enclosed malls. So as we looked at the plan at the beginning, we had said we thought we could accomplish the dispositions about a weighted average 8% cap rate If you look at the profile of these types of assets, we think those are, you know, sub-8% cap rate transactions. But again, that piece of it is sort of sub-8, and then it counters off the rest of the sales to kind of get to a weighted average of around 8 as it relates to kind of the overall assumptions on the dispositions. On the first part of your question, On debt yields, those are typically what we're looking at, sort of like high single-digit debt yields for the three or four assets that we've identified.
No, that's really helpful, and I appreciate the clarification on the 500. When you said non-enclosed malls, I thought open-air centers potentially, so I'm glad I clarified that. And then maybe just Changing gears a little bit, could you give an update on the potential densification at Los Cerritos now that it is wholly owned? Like, is that something you could potentially break ground on in the next year or two? And just curious how you're thinking about the structure of that project, whether you do it on balance sheet, use a joint venture partner. Just love to get your latest thoughts there.
So Los Cerritos is now an amazing opportunity that we control it. you know that that center continues to perform extremely well. I mean, we have options from, you know, a very good anchor store tenant that wants to take the Sears location, which obviously would, if we did that, it would impede some of our ability to put residential, you know, out in that Sears field. I think at this point, what we're trying to do is, you know, maximize the, you know, the entitlement opportunity, you know, for residential density. And more than likely, you know, we're going to sell that land, you know, entitled. Obviously, we could sell today with partial entitlements, but we think there's a lot more value in getting the entitlements. And I'd say that for us to pursue the development ourselves, you know, it would just be, you know, once again, sort of understanding the returns relative to other capital projects allocation opportunities within our portfolio. But it's a great site. It's a great center. It's only getting better. And we believe there's a lot of demand for that parcel, the Sears parcel. And we're just going for a maximum entitlement opportunity. And then we'll decide what to do.
Great. Thank you.
Thank you.
The next question comes from Alexander Goldfarb with Piper Sandler. Your line is open.
Good morning out there. Yeah, I mean, you guys have certainly achieved a lot in a short period of time. So two questions here, Jack. First is just looking at your cash balance. I think it's about $135 million right now. There's certainly a lot that you're doing, especially around CapEx leasing. So just want to understand, is there a minimum cash level that you guys think about as you're executing your plan? And then how do you balance having cash on the books versus debt paydowns?
Yeah, this is Dan. I'll take that. You know, where we're at now from a cash balance is generally where we would be sort of comfortable operating within that range. I think holistically as we look at our sort of sources and uses, you know, we have free cash flow from the business about, you know, $300 million after funds available for distribution after our operating CapEx and TAs, if you look at 2024. Most of that will obviously the run rate on the dividend, and then what's left funds the development. And to the extent our cash balances dip down a little bit from a timing perspective, we could use our line of credit to temporarily fund some of that. Or we're also looking at a refinancing right now, which would provide some excess proceeds in the near term. And then as I mentioned earlier, once we get through 25 and 26, then the free cash flow of the business starts to produce more. And then we have more optionality at that point in time to pay down debt. So right now it's kind of funding the TAs for the leasing and the development in the near term. And then as we build cash balances out in the out years, we have more optionality to pay down debt.
Okay, and then the second question is, there's a lot that's going on as you improve the tenancy. So, Jackie mentioned, you know, occupancy probably going to come down as you pull out legacy tenants, replace them with better performers. At the same time, there's some dispositions planned. Is there some sort of framework that you can provide in terms of, you know, the FFO or NOI hit that's going to occur, say, this year, next year, before it obviously rebounds? Just, you know, I know you're not giving guidance, but still it sounds like a lot of moving parts. And just is there sort of an aggregate number that we can think about impact this year and next that would help us think about this transition phase that you're going through?
It's hard to give you a precise answer to that because, you know, If we dispose of an asset faster, that makes an effect. Leasing, you know, our current leasing plan impacts this. I mean, the best way I can describe it is I think, you know, our same-story NOI is going to be roughly flat, you know, slightly up, maybe slightly down, but generally in this flat area for the next couple of years. And then it's going to start to dramatically start to increase And as we're increasing, we'll be shedding the residual remaining eddy assets that are loan givebacks. And we'll be monetizing, you know, a lot of that 500 million out parcel and land that would be used to pay down debt. And then you sort of square up on, you know, getting into that zone we talked about, you know, mid sixes, low sixes, you know, $1.80 plus or minus.
And then is there, Jack, is there like percent of, same story NOI as we think about it, what percent is that of the total NOI right now? Is that like 80% of total NOI? Like, because obviously you've got some assets that are going to be, you know, moving on.
I'm not sure. I mean, I'm not sure that's the way you want to look at this, to be honest with you. There's kind of too many moving pieces going through if you're going to try to precisely model it. And that's why I can't really, We're not really focused on it. I can tell you, I'm not focused on it. Same story in Hawaii over the next 12 to 24 months, because if we accomplish what we're going to accomplish, the uplift is more significant. And it's something we'll try to present, you know, when we put out these materials that we've talked about, this bridge. And I think that that'll be more helpful to see what we're shooting for.
Okay. Thank you.
Thanks.
And the next question will come from Handel St. Just with Mizuho. Your line is open.
Hey there. So I wanted to follow up on some earlier comments. Talking a lot about the strong leasing demand. I guess I'm curious how that's showing up in your leasing negotiations. Are you getting more term, better bumps? And I'm also curious what you might be hearing from your tenants in regards to the potential impact of tariffs as you're having these leasing conversations. Thanks.
So I'll take the first question first. Leasing demand, and I talked about this a little bit earlier. I mean, we've got a great tailwind right now. We've got a very healthy retailer environment. And we have a must-have portfolio. Even with everything that's going on in the world, If you think about it, the majority of tenants that we're leasing to are very sophisticated national retailers that can see past six months or see past 12 months. They're signing leases for seven to 10 years. I would say as our occupancy continues to increase, that'll naturally by definition help our revenue structure. So I would say the lease terms are similar to the way they've always been, but I think cost of occupancy potential will certainly increase as occupancy increases.
I was going to say one thing, too, is on renewals. I think in the past, renewals tended to be much shorter, you know, one- to two-year renewals, because there wasn't a clear direction on what needed to happen, you know, in that mall, because they didn't want to suffer the downtime. to sort of kick the can. Now on renewals for tenants that we want in the centers, we're going for longer renewals, which is a different approach. I'd also say, like, if you look at some of the retailers that are announcing earnings and giving guidance for 25, I mean, it's not heroic guidance, but it's also not tariff-based guidance. I'm sure people think about it, talk about it, but it's not sort of what we've seen so far, not embedded in retailers' 2025 earnings and guidance estimates. And so, you know, and look, a lot of our retailers have already come up with strategies to deal with China and some of the other affected areas. You know, if you're dealing with lumber coming from Canada or you're dealing with fruit coming from Mexico, obviously those type of retailers that rely on that are going to be much more sensitive to any kind of direct tariff impacts.
That's helpful, and I appreciate that. And maybe some commentary, some color, some insight into the tenant watch list here, and maybe what level of bad debt reserves you might be using in your budgeting. Thanks.
So our watch list right now, and I'll let Dan comment after I do, but our watch list is significantly lower than it's ever been. I mean, if you compare our watch list to 2019, we have about 60% fewer tenants on it and 45% less square footage, which makes a lot of sense. One, we have a very healthy retailer environment right now, but two, and we've talked a ton about this, you know, all the failing retailers, the struggling retailers pre-COVID, they didn't make it out of COVID. So that diminished our watch list exponentially. And, Dan, do you want to take the financial end of it?
Yeah, it's about 75 to 100 bps.
Got it.
Got it. Thank you, guys.
That is all the time that we have for questions. I would now like to turn the call back over to Jack Shea for closing remarks.
Thank you. We're pleased to report our progress on the many strategic initiatives within our Path Forward plan, and we look forward to seeing many of you at the upcoming city conference in Florida. So thank you very much for your time this afternoon.
This does conclude today's conference call. Thank you for