The Macerich Company (MAC) Earnings Call Transcript & Summary

Our next roundtable session with the Macerich team. Thanks for joining us today. And we want to make this as interactive as possible. Just a reminder. So if you have questions, please raise your hand or shout out. To my right is Jack Hsieh, CEO; Scott Kingsmore, CFO; and Doug Healey, EVP of Leasing. Again, thank you all for coming today. I appreciate the time. Given -- I just said Jack, it's a fairly broad group of investors in the room. We'll first start with some opening remarks about Macerich and where we stand today. Jack, you started, how many months ago now?

This is beginning of month 7.

Month 7. Okay. So Jack is new CEO. Scott and Doug have been at the company for many years. So that has stayed steady, but Jack can introduce the company today and his vision the plan.

Great. Welcome and nice to meet all of you, and I hope you had a chance -- if you know the company well, you've probably seen our path forward, listen to some of our recent earnings calls. So I'm very excited about what we're doing at the company right now. The Board's very excited. We've got a really great plan building -- rebuilding the corporate culture. We've got a number of different tactical and strategic initiatives that are underway to address balance sheet and operations. But at the end of the day, we have a what will become a great collection of enclosed and open-air shopping centers that we're operating that are really performing well and will continue to improve. I would say if you are a student of our path forward, this year, obviously, we were focused on trying to execute 3 potential asset sales. We've completed one already. We've executed [ a purchase sale ] contract on a second one, which we're working through. And the third one, we're probably not going to end up executing on and we'll kind of refocus on another group of assets that will probably be next in line. And that next group actually will be a number of outparcels that we have. We have a very large collection of credit and different types of tenancy around some of our best centers that we're in the process of kind of evaluating and trying to position to sell over the next 18 months, 20 months as we move forward. And that's not an insignificant bucket, which we can talk about later. As you know, we worked through the debt reduction exercise with Country Club Plaza and Santa Monica Place. We'll be moving forward on 2 more properties before year-end as we kind of want to have discussions with lenders on those 2 properties. And I think if you listen to my earnings call on the last quarter, we expect to have visibility around $1 billion to $1.4 billion of debt reduction by year-end. So we'll be able to tell you which properties and when. So that, I think, will be helpful. As it relates to another leg of the stool, NOI growth, Doug will spend more time on this, but leasing is obviously a critical component of what we're doing. And the momentum is really -- continues to be strong and stronger in spite of some of the flattening sales reports you might see from some of the retailers that are out there. So the best centers are still getting a lot of strong demand from a leasing standpoint. So we're working through that. And then finally, just corporately, internally, we've initiated a couple of new processes that I think I'm really excited about. One is on the leasing side. And so we presented this to our board at our last quarterly meeting, we launched it within the company now. So we have kind of a new lease procurement process that's going to really create a lot of efficiency from a man-hour standpoint at our company. And I'm really encouraged are about that. We just finished the last property review. We did it as a company, kind of went through the entire portfolio of Steady Eddie and fortress properties. Rolling forward, we'll have more quarterly reviews on assets. That was something that the company didn't do in the past. I think that's going to be extremely helpful for what we do. We are initiating 5-year models on all of our assets. And ultimately, we'll be able to provide some ability to shed some light on our NOI progress. Because as you know, executing rent commencement dates in our sector tend to be longer than other sectors. So part of what we've got to be able to demonstrate to you all is how to get that 100 basis point reduction in our leverage to that NOI incremental leasing piece that we think is there and we're seeing it. So we want to come on that. Hopefully, later this year we'll have some exhibits that begin to show our progress against that initiative. But if you're asking me how the state of Macerich, it's in great shape, and we're pretty excited about the direction we're going in. And I'll stop right there, maybe open it up for questions.

Great. Maybe we just start off, since you've been at the company now 7 months. What do you most pleasantly surprised to see that was executing well, you haven't touched or maybe you've touched, but your -- you feel like there's some areas of improvement.

I think the thing I've really been astounded by is like the people's willingness to accept change. If you think about our corporate values, empowerment was one big one. And I would say coming in, just there was a certain way that the company operated it. I think people are willing to take -- try different things, challenge each other. And like I said, like that this lease procurement process that we have something very different and it's going to save a ton of time, man hours that the company uses to kind of communicate across the platform, reduce spreadsheets and things like that. And that's just one easy thing. And we're using Yardi as the backbone of that process versus like Salesforce. But people are really excited about the change. So the company is obviously excellent at what it does. So it's really just trying to get everybody focused on the things that are really going to matter and make a difference for us. So that's I'm really presently only surprised about that.

Can you just, I guess, in a couple or a minute or 2 quickly explain the changes in at least procurement, what was the company using -- doing versus today? And where did you -- where is this -- who is -- anyone [ else in the ] system?

Other people do it. I mean just I'd say [ kind of ] coming in. Probably I spent the most time in Doug's leasing meetings because that is the lifeblood and engine room for of what we do. And sitting on the West Coast call, the East Coast calls and the different ELC, the Executive leasing committee calls that come up. And what struck me was, we've got great tenant relationships. They're kind of housed within the company in different properties and different regional offices. And a lot of e-mails, a lot of meetings, a lot of spreadsheets to try to keep everybody up to date on what was happening. And you got asset management asking leasing, what's the latest and greatest CFO and his team asking what's the latest and greatest constant barrage of people on the leasing team spending time chasing requests on from internal. And I'm like, that's not -- your job needs to be selling more. Get me more tenants, that's what I want you to do, don't do that stuff. So I was like, well, then we should just -- my first thing -- it was -- have a lot of success with Salesforce. Okay, we're going to adopt Salesforce at our company. And the technology team, thankfully, walked me off that ledge and we found a different solution with Yardi because we're on the Yardi platform. And so we've built using retail manager in effect the CRM through that. So client meetings are now documented in Yardi. Everyone can see them. So if you have a question about a tenant or a property, there should be commentary. If there's not, we have a process for that, too, a compliance process. But ultimately, like this is still pretty new, but what that's supposed to do is like if Scott has a question on leasing or asset management, has -- or property management has a question on a tenant or a location, it's all in a system now. And that didn't exist prior to me.

Is there a specific goal on reducing the number of days it takes to get the lease contract finalized? Is it increasing the number of deals done per month? Like is there something on...

All of that. I would say like I want to shorten rent commencement dates. So there's clearly more efficient ways to streamline. The moment Doug's team says we have a deal, we've shaken hands. The time it takes to actually get that tenant to pay rent in the center, you'll be shocked of kind of what happens there. So we're trying to -- part of this was to address that process to try to make it more efficient. One of the things that we can do in our control, some of it's tenant control, some of it's permitting. Some of it is internal legal processing. So that's an easy piece to fix. But to me, the most important was, I want Doug's team talking to our tenants. I don't want to -- talking to people inside the company as simple as that. The more time he spends with asset management, more time he spends, having Scott kind of update our models, that's the time that we're not selling. You've got to be selling, always be closing. So this technology is sort of it's not like rocket science, but it's just simplifying the way we're set up, the way these national accounts are set up in our platform. And I think it seems so far to be being -- it's being adopted.

And as you said, your relationships with your tenants, I mean, in the industry, it's known to be strong. So how does that change then from your leasing team and their interaction with these various tenants that anything changed from a responsibility standpoint?

I think it's too early to tell, but I think what Doug will be able to do and his leadership team is to be able to see who is calling on what. How are we dealing with 25, 26 lease expirations? Who actually called and logged in? And if not, why? And so that system didn't really exist before. It's not that we didn't do it, but if you just think about we have different regional offices, we have different relationships with different tenants the same. There's a lot of communication that's more off-line happening. And so that part when I had gone out, spent time with people in the field, they would say, yes, I spent a lot of time doing a lot of other stuff that candidly takes time away from me doing what you want me to be doing. So okay, we'll fix that. So that was like an easy fix, I'd say, easier one.

Jack, you mentioned sort of high growth. I ask you about pricing power, like what comes to mind when you think about asset sales or geography or...

Well, I mean I think our fortress properties, our Steady Eddie properties, those -- especially the ones and those higher ranked buckets, we don't have as much space. And so there's always demand for assets like that, at least tenant demand. But really, our job we're doing it properly is to try to get the right tenant demand in the right merchandising mix. Doug and his team, they do a great job of that, trying to -- at the end of the day, like if we're doing our job right, we're driving more traffic to these centers, more traffic more sales. More traffic more sales. Unfortunately, the department stores don't necessarily do that as much anymore, right? You can't rely on that. So then you have to get [indiscernible] support in there, where you have to find more leisure activity, maybe a gym or a pickle ball or so other kind of use -- entertainment use or you've got to stack a target and a Primark some other use in order to drive more traffic, more demand into these properties. And I would say that's probably the biggest opportunity that is within our portfolio in a way, covered like crush the sector, right, in a way, just there's so much turbulence within our tenant roster, not just us, but any landlord on the enclosed space. But it's also a great opportunity, right? You've got a chance to reset your merchandise mix, how do you bring more Primark in your center? How do you bring more -- create more opportunity to create that traffic. So I'd say we're seeing really good solid leasing momentum, not just signing deals, but what we see in our forward pipeline. I mean, Doug, you might just comment on just a real important stat we look at internally.

Yes. Thanks, Jack. So we've been touting for the last year definitely that we had a record leasing year dating back 30 years to when we went public in terms of square footage and leasing volumes. That's kind of in the rearview mirror. Those are leases that we've signed. But I can tell you, this year, year-to-date, we're on par with where we were last year. . What we like to look at now is we have a leasing committee that meets every 2 weeks. And to me, we look at deals, we approve deals, they go to lease, they get signed, they go into our pipeline. To me, that's much more forward-looking than the leases we signed. And I can tell you that year-to-date, we're 20% ahead of where we were last year. And again, this is -- these are deals that we're approving that go to lease that go into our pipeline. So I think if that's any indication, and I think it is, the outlook is very good. And we have a very healthy retailer environment out there. We have for the last several years. And there's been a lot of talk about sales, sales are flat and they are. They're flat in the industry. We're basically flat. But to date, there doesn't seem to be a correlation between retailer demand and what's going on with sales, what's going on with the macroeconomic environment, what's going on with the election, the demand is still out there.

Including luxury and is luxury still spreading out? We saw them open up various different lines, men's, women's, I mean, still seeing?

So Luxury has definitely slowed this year but for 2 reasons really, up against very high comps, high double-digit comps the last 2 or 3 years. So that's tough to sustain. The Asian consumer has slowed definitely. But again, that -- we don't have a lot of luxury. I think 0.5% of our portfolio GLA is luxury. But given the slowdown in sales, we still haven't seen a decrease in luxury demand. For example, you all know that few years ago, we redid the Neiman Marcus Wing at Scottsdale Fashion Square, leased it to 100%. Sales productivity was off the chart, but so was the demand, and we couldn't accommodate all these luxury retailers. So we step 2 went to the Nordstrom wing and did the exact same thing in the Nordstrom wing that we did in the Neiman Marcus wing, just to accommodate the demand. And we're now, I think, 90% committed, and there's not much space left. And you're talking about some of the major luxury guys like our [ mezz like Saline ]. So again, we're still seeing the demand not necessarily correlated with sales.

Okay. Going back to the path forward initiatives and plan. Jack, you mentioned the goal this year was to dispose of 3. It sounds like you said the third is not going to happen. Can you share any more with us like why -- is that not going to happen? Is there something specific with that property? Has something changed in the transaction market?

I would say like when we came up with this plan, like I would say, we have everything worked out. And we had a general idea of what our targets were. We had some really early wins with Biltmore. That was pretty immediate. And what we were really clear on was we wanted to come up with a plan that had multiple ways of success. Like multiple ways to kind of get done. Not say I got to sell this, this or this or I'll not succeed. So we have a kind of an internal list. It's not broadly shared internally of things that are really actionable. And we don't have to rush that portion of it. I would say like the thing we have to really focus on is which -- if we're going to reduce debt, which of the givebacks that we're going to do. We're really clear on those and kind of mentioned to you, there's 2 more coming. Those will be big debt relief initiatives for us. On the dispose, cap rate is really important for it to make sense. And I'd say there's sort of 2 things that have changed since we put the initial plan out a few months ago. The first is we're probably going to exceed refinancing rate of 6.6% that we have embedded into our forecast.

Have exceeded.

It's improved like in other words, lower rate. So we're seeing that. We're experiencing that in Queens right now on that refi. We think that's going to actually help us on these outparcels. They're more than we initially kind of thought were opportunities. So it's a more robust portfolio and will probably kind of benefit with lower interest rates in terms of our ability to get a better cap rate. On the mall side, in terms of dispose, the one that we're not going to do -- what's interesting about it is it's enclosed, it's big. It's got a really high growth rate -- NOI growth rate. It's kind of embedded into it. If you were to ask me what are our most liquid assets today, if I had to go and raise money like really quickly, it's outparcels and open air centers to raise them really fast and pretty good cap rates. I would say right now, we're not considering selling open air centers. We did Biltmore That was the first one. And they're -- between outparcels and one other property, we think that will be enough to sort of satisfy our -- this bucket.

So I guess, to conclude on this third, it sounds like the cap rate wasn't what you were looking for.

Recall, the pricing didn't make sense.

Yes. Okay. And then on top...

Relative especially for the growth profile of that asset.

And you didn't feel that -- you don't feel the pressure to do it because of the mall?

Pressure, no.

Okay. And then you did mention also at the beginning, you talked about the debt reductions. Can we talk about that a little bit more?

Yes. I mean we haven't contacted the lender yet. I can't tell you which one is, right, obviously. But we think that more than likely, we'll approach the lender and have discussion with them and we'll see if there's an ability to restructure the loan. But just extending by itself the loan even at below market rates, that's not going to be enough. There'll have to be a significant modification because part of it is we believe those properties doesn't really help us just to kind of kick the can for 3 years because those assets need more capital, much more requirement in order to drive value. So well, Bill, will give more color on that after we have those discussions.

[indiscernible].

Yes, for the most part. Yes.

Yes. For the most part. Yes.

For the most part. I think in virtually every instance Country Club Plaza was certainly in that case, Santa Monica Place is a delevering event as well. I'd say, for the most part, they're delevering events or the asset is in a position where it just been out positioned within the marketplace. It may have no NAV remaining. They have negative cash flow. So there's a variety of different things, but I'd say in most instances, it's a delevering of it.

They're delivering and then kind of, unfortunately, for us, we're just -- they're FFO dilutive for us because these were all -- they will have very low coupon. So high FFO contribution. But to me, like that's kind of think moves a little bit, right? That's a headwind for us. So whether we do it today or do it in the future, we kind of have to move it out. And so one of the challenge -- someone asked me a question on the call, put guidance out, like I want to have the flexibility to execute this plan, got lots of different ways. If I lock into an FFO, I limit my ability to move. And so we kind of understand what we have to do, which is get down in the low 6s, get to around $1.80 per share of FFO and we could do better than that, actually, there's a case for that. So we kind of understand what we need to do and we feel like we're making really good progress at this point.

Taking a step back on the path for plan. I believe you had said the goal was over a 4-year period. Is that 4 years or am I correct? Or...

Yes, it's 4 years.

4 years. Has that changed -- and by the way, am I correct on that the 4 years?

Yes, it's 3. It's like 3.5 to 4 years.

Okay. 3.5 to 4, okay.

But I would say like as we get into end of this year into the middle of next year based on the materials we put out, it will be really clear whether or not we're getting to that, which is -- because like I said, the debt piece -- the debt reduction is really easy. The dispose are pretty straightforward. I just have to kind of go through the next series -- the next tranche of properties. To me -- what kind of -- I would say I'm looking at very carefully is the NOI growth piece because that's all -- that's out of our control, right? I mean that's based on -- that sort of like less predictable because that's based on continuing to lease at the rate we're leasing at, which Doug has said, we're ahead of schedule right now. And there doesn't seem to be any kind of headwinds against that. So we expect to continue to be able to maintain that momentum. The other thing is like we are -- some of the -- the other big opportunity is like that perm the temp-to-perm conversion. We do have an opportunity to continue to convert temporary tenants to permanent tenants. The part of that is we've got some anchor resolution that we're going through. We're making progress on those initiatives at some of our select centers. So that's another piece of the puzzle between some of the development, some of the regular leasing, some of the temp to perm, that all kind of brings that NOI growth rate 3 to 4.

[indiscernible].

Yes. We're doing everything we can to bring them forward. And what I've told the team is like once we sign the lease, we're sort of on the shot clock. That's the data we don't get the money. So that's how I think about it. And the minute, we shook hands to when they sign lease, that's money that we should be getting, right? So how do we figure out? How to get them in faster. What is the -- and some of it's in our control, some of its tenants, tenants -- a lot of tenants they have their annual pipeline. If you don't meet certain time lines, they kick it to the next year. So look, we have to make sure we're at the front of the bus in terms of our tenant's pipelines as they manage their pipeline. But the way I think about it is that the minute we've signed agreed on terms that's a day of revenue that we're missing I think about it. So how do we tighten? And we've had our legal team, leasing team, ops team kind of evaluate how we do certain things and how we monitor if we're behind or ahead. And so I think we'll see some improvement there.

Todd, go ahead, please.

Jack, you talked about volume pickup 20% in leasing. [indiscernible].

How is what looking?

Cash trends versus [indiscernible].

Spread trends? Our spreads have been positive for the last what Scott, 3 or 4 quarters.

Yes, longer than that. On the same-space basis, our spreads are in the strong single digits, call it, 8% or 9%, looking at -- ignoring space variability where you may be combining spaces or slicing them up total rent versus a total rent 8% to 9% growth. We've seen strong spreads, I'd say, for about the last 2 years. And really, it's a function of soaking up some of the excess occupancy, should I say, the excess vacancy following on the pandemic. And you really have to get to that critical tipping point where you've taken supply off the table where you can actually start to push rate. I think as we continue to manicure this portfolio and prune it down, we'll see continuing growth in occupancy. In fact, if you looked at our core portfolio, our go-forward portfolio, it's about 95% occupied, which is really full occupancy. You see the level of temporary tenant occupancy go down if you start to slice out that lower I shouldn't say lower, that Eddie grouping that may not be part of our portfolio. So you really do see improvement in metrics. And I think what you'll expect to see from us in 18 to 24 months is extremely solid metrics supported by strong spreads.

[indiscernible].

About 8% to 9% in terms of spread.

Total temp.

Total temp just over 8% today. But in our go-forward portfolio, it's about 150 basis points less. So again, as we refine our portfolio, we'll find our leasing progress significantly enhanced.

And what would you kind of say an actual right...

So in the fullness of time, call it, 2014, 2015, about 5%, 5.5% temporary occupancy. Yes. That's really full employment.

[indiscernible].

It's on...

The question is on occupancy cost to the sales, please.

Yes, today, it hovers around 12%, just a touch less. That's a hard one to move because you can only access so much which space. We have room for growth, for sure. With high-quality sales productivity, there's certainly room for growth. It's just -- it's traditionally in our space, it's a difficult one to move very significantly because sales are moving for the entire tenant population each and every year, which you can only really touch about 8% to 10%, 12% of your leases. So it's kind of disproportionate, but there's definitely room for movement, especially in the higher quality.

In terms of the initial buckets that you created, the categories for the various malls, Doug, are you seeing any -- in terms of the strength in leasing, are you seeing anything surprising from a demand standpoint based on those buckets that you may change your mind or move an asset from a bucket to another bucket?

I think there's that potential in the lower portion of the Steady Eddies depending on a few things. There's a few that could go down. I also think there is a few at the top of the Steady Eddies that could become fortress in the not-so-distant future, assuming some certain things happen. But no, what we're really seeing right now, especially in our better centers and Scott alluded to this earlier, is really the first time since the pandemic, we got pricing power. And if you think about Tysons or Scottsdale or Kierland or Broadway, for the first time in a long time, we have competition for spaces. And almost by definition when you have competition, rate goes up. And that's what we're starting to see. Really for the first time since the pandemic, I think, we've got enough supply off the table to make that happen. .

And I was thinking just given the lack of vacancy across retail that maybe there's a stronger demand for the Steady Eddies or your bottom bucket than expected, but it sounds like it's still...

The bottom bucket is harder. I mean, generally, if it's a bottom bucket, it means trader is either more competitive or trade areas is more rural and [ Tillys ] are really focused. They want to be on the best properties, best centers and you've got -- and that's all going to -- as a landlord really going to be -- that would be benefit from that dynamic. The secondary properties are just more challenged, less pricing power, more incentive to drive occupancy, more incentives required. So to me, those are harder centers to deal with. And I think that's -- so why we made a decision on the bottom end of our portfolio to come up with a kind of a time frame and a game plan to run those properties and ultimately monetize them because there is meaningful amount of NAV actually in that portfolio.

A leasing standpoint, a big drain on the leasing team, right?

Well, we're actually -- the one piece that we haven't addressed, which we will time from an asset management standpoint, leasing standpoint, we haven't segregated that group out, which we will fairly soon in terms of segregating how those properties are run.

Every property has to stand on its own at this point or...

Yes, pretty much.

Yes.

Yes, absolutely. Yes. there's no subsidization anymore.

[indiscernible].

It's a good question. So it starts with kind of a 5-year plan on each asset. And trying to evaluate the positioning of do we get the right -- we're going to get the right dollar reinvestment out of the 5-year plan. Some of it is going to be defensive like we absolutely have spend and do what we've got to do. Others are more opportunistic. So like to me, like Green Acres is opportunistic. It's -- that's going to be a phenomenal project, making progress on all the necessary approvals to get shop right in there and leasing demand has been really great for that property. Some of the capital is going to be defensive in some of these centers that we put in, absolutely required to kind of stay relevant because at the end of the day, some of these Eddies that are leaving or because we didn't put that capital in. And over time, others that do kind of take advantage and then kind of missed that opportunity. But it's all going to kind of be based on that 5-year plan, kind of this kind of quarterly review that we're doing that wasn't really happening here before. So we kind of get the real centralized decision-making on kind of strategic investments and decision-making around these properties.

And then just to confirm, any update on Express Rue and the impact this year?

We had a handful of Rue Stores, Rue21, those are now closed, very small tenant, like their footprints were 2,000 to 3,000 square feet, then pay a lot of rent. Express, we finalized our terms with them. We had 26 stores, 10 of which vacated about 85,000 square feet. And Doug, I think at this point, we have deal flow on from a permanent standpoint either in documentation or an LOI on the...

And we have 2 signed leases and the remaining spaces are all -- we're trading paper on it. If there's a silver lining with Express, it's that -- if you think about it back in the day, Express was the darling of the mall. And they got the best real estate and the best centers. So the space re-leasing is center court space, it's 40-yard line space. We're not leasing space up against the vacant department stores. So that's been extremely helpful.

We fundamentally derisk that out of our portfolio there.

Great. I know we're out of time. We do have 3 very quick questions, rapid fire. If you could respond with rapid quick answer, that would be helpful. First, do you expect real estate transactions to increase once the Fed starts to cut yes or no?

Yes.

If we ask when...

Did anybody say no?

Not yet.

Okay.

When do you expect them to pick up in the fourth quarter of this year, first half '25 or second half '25?

I think for what we do first half of next year, we'll start to see a more dramatic increase.

Okay. Second, how would you characterize demand for space today, improving, steady or weakening?

I would say, improving.

Yes. Definitely.

Okay. And finally, how would you characterize your AI spending plans over the next year, higher, flat or lower?

Flat.

Great. Thank you to the Macerich team. Thanks, everyone.

Thank you.