Yahoo Finance The Macerich Company (NYSE:MAC) Q1 2024 Earnings Call Transcript
The Macerich Company (NYSE:MAC) Q1 2024 Earnings Call Transcript April 30, 2024
The Macerich Company misses on earnings expectations. Reported EPS is $-0.56039 EPS, expectations were $0.39. The Macerich Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2024 Macerich Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would like now to turn the conference over to your speaker today, Samantha Greening, Director of Investor Relations. Please go ahead.
Samantha Greening: Thank you for joining us on our first quarter 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 and including statements regarding projections, plans or future expectations. Actual results may differ materially due to a variety of risks and uncertainties set forth in today's press release and our SEC filings. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included in the earnings release and supplemental filed on Form 8-K with the SEC, which are posted on the Investors section of the company's website at macerich.com.
Joining us today are Jack Hsieh, President and Chief Executive Officer; Scott Kingsmore, Senior Executive Vice President and Chief Financial Officer; and Doug Healey, Senior Executive Vice President of Leasing. And with that, I turn the call over to Jack.
Jackson Hsieh: Good morning, and thank you all for joining my first quarterly earnings call for the Macerich Company. I am grateful for the Board of Macerich selecting me at this time to chart a new direction and lead the company especially in light of our recent 30-year listing celebration on the New York Stock Exchange. I am very optimistic and confident about our company's future. Since March 1, I've had the privilege of meeting over 80% of our company's associates in each of our 6 office locations and in my property tours of 22 of our largest assets. I can tell you that there is tremendous passion and desire for change and new leadership from our associates. Our well-tenured team members across many business lines are excellent.
Many of our assets are fortress-like in terms of their market position, annual customer visits, tenancy and overall sales production. And while we have proven operational processes, there is even more room for improvement. I also met with several tenants and joint venture partners of Macerich who are excited about moving forward with us. In our most recently quarterly Board of Directors meeting last week, I outlined my strategic plan for the company, our path forward, which focuses on the following key objectives that we expect to take 3 to 4 years to complete. Number one, simplifying the business. We expect to sell assets and consolidate certain JV interest over time. Asset sales will be focused on whether a center is core to our strategy, including sales per square foot and other factors such as debt in place, trade area positioning, anchor positioning, city dynamics, et cetera.
With regards to JVs, we will be very selective on deploying capital to consolidate JVs. Number two, improve operational performance by increasing NOI through backfilling certain vacant anchor locations, NOI improvement in our large eastern seaboard assets, NOI from our current executed lease pipeline that will produce $70 million in incremental rental revenues from new deals in 2024, '25 and '26, and improving permanent occupancy throughout the portfolio. We will be very selective with regard to new development and redevelopment spend. Near-term projects include the expansion at Green Acres and flat iron crossing. And number three, reduce leverage to the low to mid-6x is a major priority for Macerich. In addition to focusing on our core business, which generates annual free cash flow after dividends of $150 million and executing on our asset sale plans.
We also plan to return 4 to 6 properties back to lenders at loan maturity. This will take time, but we have a path to achieving this objective. One of the key intentions of our plan is to increase the competitiveness of our cost of capital. And if the market responds the way we expect, we may opportunistically issue equity over time to accelerate the deleveraging strategy. Based on our plan, $500 million of new equity reduces leverage by two-third of a turn. By executing on this plan, we will concentrate our portfolio in our best properties, which are thriving retail centers and will have a substantially stronger balance sheet. This will position Macerich to be offensive on acquisitions, reinvestment and select development. In the last 60 days since I've joined the team, we have already started executing this plan.
For example, we are underway on several asset transactions, which include property sales, consolidation of JV interests on certain assets and potentially giving back properties to lenders. The timing of these transactions will impact our reported financial results and include noncash items that are difficult to forecast. So for the time being, we will be withdrawing our 2024 forecasted FFO per share guidance. We plan on reissuing guidance at the right time as we have more clarity on the timing and certainty of these transactions and initiatives that we are implementing as part of our strategic plan. Three weeks ago, I hosted a company-wide town hall Zoom meeting whereby I presented our company's new mission statement, corporate values and property regrouping.
Our mission at Macerich is to own and operate thriving retail centers. that bring our communities together and create long-term value for our shareholders, customers and partners. Our six corporate values are excellence, integrity, good relationships, empowerment, optimism and fun. I, along with our senior leadership team are constantly reinforcing all of us to challenge the status quo across the organization, do what you say, do your absolute best, be transparent, work together seamlessly, take ownership, be confident and celebrate our success and progress as we strive to complete our strategic plan and mission statement. Again, I am very excited and confident about what our company will look like in the coming years. With that, I'll turn the call over to Scott to go through our first quarter results and financing activity.
Scott?
Scott Kingsmore: This quarter, we were pleased by the continued strength of our operating fundamentals, mainly by continued robust leasing volumes, year-over-year occupancy growth and strong base rent leasing spreads, each of which Doug will speak to following my commentary. However, quarterly FFO did not meet our expectations. FFO per share for the first quarter was $0.33. This quarterly FFO result was $0.05 less than our expectations and guidance and $0.10 less than the first quarter of 2023 at $0.43 per share. The primary major factors contributing to the quarterly FFO per share change versus our expectations are as follows: $0.025 or roughly half the miss versus our guidance was due to the impact from Express and resulted from reserves taken against past due rent and from write-offs of straight-line rent and other noncash receivables.
I will provide more color on the potential impacts from this retailer in a few moments. The balance of the decline in FFO relative to our expectations came primarily from onetime nonrecurring costs associated with our recent leadership transition mainly from legal, search and consulting costs. two, reductions in lease termination income; three, declines in straight-line rents and lastly, declines in the quarter from our on-premise advertising business. In addition to these factors that I just mentioned, which were not part of our prior guidance, the following other primary factors contributed to the remainder of the $0.10 difference in FFO relative to the first quarter of last year each of which are consistent with our guidance and expectations.
One, the $5 million increase in interest expense; two, a $3 million decline in land sale gains and lastly, three, from various nonrecurring other income that was recognized during the first quarter of 2023 and did not repeat in 2024. During the quarter, same center NOI, excluding lease termination revenue, decreased 1.9%. Our expectations from our original guidance were for only a nominal increase in same-center NOI during the first quarter, with the continued pickup thereafter throughout 2024 due to tenant openings from our strong lease pipeline. The quarterly underperformance versus expectations in same-center NOI was primarily due to, again, Express and to a lesser extent, from lower advertising income in the quarter. As Jack noted, at this time, we have withdrawn our prior guidance for 2024 funds from operations, given that our earnings will be impacted by transactions contemplated within our strategic plan, including asset sales, consolidation of selected joint venture assets and potential givebacks to our lenders, the timing of which is uncertain and cannot be estimated at this time.
In addition to earnings impacts from our first quarter results, here are a few other items to highlight that may impact our earnings results for this year in 2024. One, we did not anticipate the bankruptcy filing of Express with our earnings guidance. To frame Express, we have 23 stores with them, and approximately $15 million of total rent at our share. Based on my prior commentary, this event has already had a negative impact on the first quarter and will continue to have a negative impact for the balance of this year and into next year when all store closures and any rent modifications that are negotiated anniversary. With the filing having only just occurred, it is very early days in this process. Our current preliminary expectations are that this could have a range of $0.05 to $0.06 negative impact on 2024 FFO, including the impact that we just recognized in the first quarter, and that could have roughly $0.06 to $0.08 negative impact on FFO on an annualized basis.
At this time, it seems that at least 15 Macerich portfolio Express stores will close likely within the second quarter. These 15 closures alone will have an approximately 50 basis point negative impact on our small shop occupancy. These are generally good locations and we should be able to release them well over time. As well, we do not have visibility at this time into a significant amount of lease termination income. So our initial estimates for $10 million of such revenue in 2024 may be cut in half. As Jack noted, it is possible we may acquire our partner's interest in certain assets. These purchases would be FFO accretive except for the fact that we would have to mark-to-market the below-market secured debt that we would assume with those acquisitions.
Such noncash charges would make those transactions FFO dilutive by roughly $0.02. Now onto balance sheet matters. We continue to make good progress addressing our debt maturities. On January 10 of 24 our joint venture closed a $24 million refinance of the existing $23 million loan on Boulevard shops in Chandler, Arizona. The new loan bears variable interest at SOFR plus 2.5%. It is interest only during the entire loan term and matures on December 5, 2028. On January 25, 2024, we closed $155 million refinance of the existing $117 million loan on Danbury Fair. This new 10-year loan bears interest at a fixed rate of 6.39% and is interest only during the majority of the long term. On March 19, '24, we closed a three-year extension of the $85 million loan on Fashion Outlets of Niagara.
This extended loan will bear the same fixed interest rate of 5.9% and will mature in October of '26. We recently repaid in full the $8 million remainder of the Fashion District in Philadelphia, which is now fully unencumbered. We are in the process of closing a two-year extension of the $151 million loan on the Oaks, which matures on January 5, 2024, the new interest rate during the first year of the extended term will be 7.5%, which then increases to 8.5% during the second year of the extended loan term. We are in the process of closing a refinance of the $256 million loan on Chandler Fashion Center. The loan matures on July 5, 2024, the new five-year loan, which is expected to be $275 million, will bear a fixed interest rate that is yet to be locked.
Despite the recent rise in treasury yields, the financing market for Class A retail real estate remains strong, but with an increase in rate expectations relative to prevailing rate curves from earlier this year, and also relative to our expectations at the beginning of the year. We currently have approximately $640 million of available liquidity, including $465 million of capacity available capacity, unborrowed capacity on our revolving line of credit. With that, I will turn it over to Doug to discuss the leasing and operating environment.
Doug Healey: We had another strong quarter in terms of leasing volumes and metrics. Occupancy at the end of the first quarter was 93.4%. That's down slightly from Q4 2023 and but an improvement of 120 basis points year-over-year. We obviously expect this metric to decrease slightly given the recent news on Express bankruptcy and future potential store closings. Nonetheless, our team is working diligently to backfill these spaces as soon as possible. First quarter sales were basically flat when compared to first quarter 2022. Sales per square foot as of March 31, 2024, were $837. That's up $1 when compared to the first quarter of 2023. Trailing 12-month base rent leasing spreads remained positive at 14.7% as of March 31, and 2024.
That's down slightly from the last quarter, but an increase of 810 basis points when compared to March 31, 2023. In the first quarter, we opened 540,000 square feet of new stores. That's almost 300% more square footage than we opened during the same period last year. The most notable opening of the quarter was the highly anticipated Caesars Republic Hotel, which opened March 6 at Scottsdale Fashion Square. This modern 11-story 265-room hotel is situated on the north side of the property and will be a great amenity for our tourism customers. In addition to its luxurious rooms and suites, the hotel also features the fabulous restaurant Luna by world-renowned Chef, Giada de Laurentiis. Other notable openings in the quarter include a flagship Foot Locker at Tysons Corner Center; Roth's and Cody also at Tysons, J.
Crew at the Village Corta Madera and Danbury Fair; Starbucks at Deptford Mall, Pandora at Valley River, Maje & SANDRO at Scottsdale Fashion Square, Round 1 at Danbury Fair and Kiln at SanTan Village. Now let's look at the new and renewal leases we signed in the first quarter. In the first quarter, we signed 222 leases totaling just over 1 million square feet. This represents a 14% increase in lease square footage relative to the first quarter 2023. And let's keep in mind, 2023 was a record leasing year for us, dating back 30 years to when we first became public. As is the norm in the first quarter, 2024 lease expirations were a top priority. To that end, we signed a 21 deal renewal package with Abercrombie & Fitch, an 18 deal renewal package with Luxottica [ph], a 10 deal renewal package with GNC, seven renewals with Verizon, five renewals with T-Mobile, and four renewals with Zumiez [ph].
So with those and others, we now have commitments on 65% of our 2024 expiring square footage that is expected to renew and not close with another 24% in the letter of intent stage. Other notable new leases signed in the first quarter featured Gap at Queen Center, Burberry, Marc Jacobs, RedStack and Hollister, and Fashion Outlets of Chicago, Tilly's at Scottsdale Fashion Square and Miniso at Eastland. In the emerging brands category, we signed new leases with Verity and Guyana at Twenty Ninth Street; [indiscernible] and Eddie at Tysons Corner, Warby Parker at Danbury Fair and Queen Center. Lastly, we signed a new with Cheesecake Factory at Tysons Corner Center. Cheesecake will join the recently signed Maggiano's and Level 99 and will round out our food and entertainment initiative in Tyson's East Wing.
Turning to our leasing pipeline. At the end of the first quarter, we had 130 leases for 1.8 million square feet of new stores, which we expect to open in 2024, 2025 and early 2026. In addition to these signed leases, we're currently negotiating leases for new stores totaling 500,000 square feet, which will open in 24, 25 in early 2026. So in total, that's nearly 2.3 million square feet of new store openings throughout the remainder of this year and beyond. And again, I want to emphasize, these are new leases with retailers not yet open and not yet paying rent, and these numbers do not include renewals. This leasing line of new store openings now accounts for almost $70 million of incremental rent in aggregate, which will be realized in 2024, 2025 and 2026.
And this incremental rent will continue to grow as we continue to approve new deals and sign new leases. So to conclude, our leasing and operating metrics were very solid in the first quarter. Leasing volumes were extremely strong in excess of square footage leased during the first quarter of 2023, thus maintaining a very strong pipeline of stores that will open this year, next year and into 2026. We opened over 500,000 square feet of new stores, that's 300% more square footage than we opened during the same period last year. Occupancy was 93.4% and up 120 basis points year-over-year. However, we do expect this metric to decline slightly as a result of the express bankruptcy. And lastly, base rent leasing spreads were 14.7%. That's an increase of over 800 basis points from the first quarter last year.
With that, I'll turn it over to the operator to open the call up for Q&A.
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