Earnings Call Transcript - MAC Q1 2024

Samantha Greening, Director of Investor Relations

Thank you for joining us on our first quarter 2024 earnings call. During the course of this call, we will be making certain statements that may be deemed forward-looking within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995, including statements regarding projections, plans or future expectations. Actual results may differ materially due to a variety of risks and uncertainties set forth in today's press release and our SEC filings. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included in the earnings release and supplemental filed on Form 8-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.

Jack Hsieh, CEO

Thank you, Samantha. Good morning, and thank you all for joining my first quarterly earnings call for the Macerich Company. I am grateful for the Board of Macerich for 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 six office locations and in my property tours of 22 of our largest assets. I can tell you that there is tremendous passion and desire for change and new leadership from our associates. Our well-tenured team members across many business lines are excellent. Many of our assets are fortress-like in terms of their market position, annual customer visits, tenancy, and overall sales production. 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 recent quarterly Board of Directors meeting last week, I outlined my strategic plan for the company, our path forward, which focuses on the following key objectives that we expect to take three to four years to complete. Number one, simplifying the business. We expect to sell assets and consolidate certain joint venture interests over time. Asset sales will be focused on whether a center is core to our strategy, including sales per square foot and other factors such as debt in place, trade area positioning, anchor positioning, city dynamics, etc. With regards to joint ventures, 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 spending. Near-term projects include the expansion at Green Acres and FlatIron Crossing. Number three, reducing 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 four to six 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-thirds of a turn. By executing on this plan, we will concentrate our portfolio in our best properties, which are thriving retail centers, and will have a substantially stronger balance sheet. This will position Macerich to be offensive on acquisitions, reinvestment, and select development. In the last 60 days since I've joined the team, we have already started executing this plan. For example, we are underway on several asset transactions, which include property sales, consolidation of JV interests on certain assets, and potentially giving back properties to lenders. The timing of these transactions will impact our reported financial results and include non-cash items that are difficult to forecast. So for the time being, we will be withdrawing our 2024 forecasted FFO per share guidance. We plan on reissuing guidance at the right time as we have more clarity on the timing and certainty of these transactions and initiatives that we are implementing as part of our strategic plan. Three weeks ago, I hosted a company-wide town hall Zoom meeting whereby I presented our company's new mission statement, corporate values, and property regrouping. Our mission at Macerich is to own and operate thriving retail centers that bring our communities together and create long-term value for our shareholders, customers, and partners. Our six corporate values are excellence, integrity, good relationships, empowerment, optimism, and fun. I, along with our senior leadership team, am constantly reinforcing all of us to challenge the status quo across the organization, do what you say, do your absolute best, be transparent, work together seamlessly, take ownership, be confident, and celebrate our success and progress as we strive to complete our strategic plan and mission statement. Again, I am very excited and confident about what our company will look like in the coming years. With that, I'll turn the call over to Scott to go through our first quarter results and financing activity. Scott?

Scott Kingsmore, CFO

Thank you, Jack. This quarter, we were pleased by the continued strength of our operating fundamentals, including robust leasing volumes, year-over-year occupancy growth, and strong base rent leasing spreads, which Doug will discuss after my comments. However, quarterly funds from operations (FFO) did not meet our expectations. FFO per share for the first quarter was $0.33, which was $0.05 below our expectations and guidance and $0.10 less than last year’s first quarter, which was $0.43 per share. The main factors contributing to the change in quarterly FFO versus our expectations include a $0.025 impact from Express, resulting from reserves taken against past-due rent and write-offs of straight-line rent and other non-cash receivables. I will provide more details on this retailer shortly. The remaining decline in FFO compared to our expectations was primarily due to one-time nonrecurring costs related to our recent leadership transition, including legal, search, and consulting expenses; reductions in lease termination income; declines in straight-line rents; and decreases from our on-premise advertising business. Additionally, several other factors contributed to the $0.10 difference in FFO compared to the first quarter of last year, all of which align with our guidance and expectations: an increase of $5 million in interest expense; a decline of $3 million in land sale gains; and various nonrecurring income in the first quarter of 2023 that did not repeat in 2024. During the quarter, same-center net operating income (NOI), excluding lease termination revenue, fell by 1.9%. Our original guidance anticipated only a nominal increase in same-center NOI for the first quarter, with a further increase expected throughout 2024 due to tenant openings from our strong leasing pipeline. The underperformance in same-center NOI relative to expectations was mainly due to Express and, to a lesser extent, lower advertising income for the quarter. As Jack mentioned, we have withdrawn our previous guidance for 2024 funds from operations, as our earnings will be affected by transactions within our strategic plan, including asset sales, consolidation of selected joint venture assets, and potential concessions to our lenders, the timing of which is uncertain. In addition to the earnings impacts from our first quarter results, several other items may influence our earnings in 2024. We did not foresee the bankruptcy filing of Express when we set our earnings guidance. To give context, we have 23 stores with them and about $15 million in total rent at our share. This event has already negatively impacted the first quarter and will continue to affect the remainder of this year and into next year as store closures and any negotiated rent modifications take effect. Given that the filing just occurred, the process is still in its early stages. Our preliminary expectations are that this may result in a $0.05 to $0.06 negative impact on 2024 FFO, including the impact we recognized in the first quarter, which could annualize to a $0.06 to $0.08 negative impact on FFO. Currently, at least 15 of our Macerich portfolio Express stores are expected to close, likely during the second quarter, leading to around a 50 basis point negative impact on our small shop occupancy. These locations are generally strong, and we anticipate being able to re-lease them over time. Additionally, we do not have clear visibility into significant lease termination income at this time, so our initial estimate of $10 million for such revenue in 2024 may be reduced by half. As Jack noted, we may acquire our partner's interest in certain assets, which would be FFO accretive, except we would also need to account for the below-market secured debt we would take on with those acquisitions, causing non-cash charges that would make those transactions FFO dilutive by about $0.02. Now, regarding our balance sheet, we are making good strides in addressing our debt maturities. On January 10, 2024, our joint venture closed a $24 million refinance of an existing $23 million loan on Boulevard Shops in Chandler, Arizona. The new loan has a variable interest rate at SOFR plus 2.5%, is interest-only throughout its term, and matures on December 5, 2028. On January 25, 2024, we finalized a $155 million refinance of an existing $117 million loan on Danbury Fair. This new 10-year loan has a fixed interest rate of 6.39% and is mainly interest-only. On March 19, 2024, we completed a 3-year extension on the $85 million loan for Fashion Outlets of Niagara, maintaining the same fixed interest rate of 5.9%, maturing in October 2026. We have also fully repaid the remaining $8 million loan on Fashion District in Philadelphia, which is now unencumbered. We are currently finalizing a 2-year extension on the $151 million loan for the Oaks, set to mature on January 5, 2024, with a new interest rate of 7.5% for the first year and increasing to 8.5% in the second year. Additionally, we are closing a refinance of the $256 million loan on Chandler Fashion Center, maturing on July 5, 2024. This new 5-year loan is anticipated to be around $275 million with a fixed interest rate yet to be determined. Despite the recent increase in treasury yields, the financing market for Class A retail real estate remains robust, although rate expectations have risen compared to previous benchmarks from the start of the year. We currently have approximately $640 million in available liquidity, including $465 million in unborrowed capacity on our revolving line of credit. With that, I will hand it over to Doug to discuss the leasing and operating environment.

Doug Healey, Senior Executive Vice President of Leasing

Thanks, Scott. We had another strong quarter in terms of leasing volumes and metrics. Occupancy at the end of the first quarter was 93.4%. That's down slightly from Q4 2023 but an improvement of 120 basis points year-over-year. We obviously expect this metric to decrease slightly, given the recent news on Express bankruptcy and future potential store closings. Nonetheless, our team is working diligently to backfill these spaces as soon as possible. First quarter sales were basically flat when compared to the first quarter of 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, 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 on March 6 at Scottsdale Fashion Square. This modern 11-story, 265-room hotel is situated on the north side of the property and will be a great amenity for our tourism customers. In addition to its luxurious rooms and suites, the hotel also features the fabulous restaurant Luna by world-renowned chef, Giada De Laurentiis. Other notable openings in the quarter include a flagship Foot Locker at Tysons Corner Center; Rothy's and Coty also at Tysons; J. Crew at The Village at Corte Madera and Danbury Fair; Starbucks at Deptford Mall; Pandora at Valley River; Maje and 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, a 10-deal renewal package with GNC, seven renewals with Verizon, five renewals with T-Mobile, and four renewals with Zumiez. So with those and others, we now have commitments at 65% of our 2024 expiring square footage that is expected to renew and not close, with another 24% in the letter of intent stage. Other notable new leases signed in the first quarter featured Gap at Queens Center, Burberry, Marc Jacobs, 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 29th Street; Guyana, Biore, and Yeti at Tysons Corner; Warby Parker at Danbury Fair and Queens Center. Lastly, we signed a new lease with Cheesecake Factory at Tysons Corner Center. Cheesecake will join the recently signed Maggiano's and Level 99 and will round out our food and entertainment initiative in Tysons East Wing. Turning to our leasing pipeline. At the end of the first quarter, we had 130 leases for 1.8 million 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, and 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 pipeline of new store openings now accounts for almost $70 million of incremental rent in aggregate, which will be realized in 2024, 2025, and 2026. 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%, 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.

Operator, Operator

And the first question comes from Jeffrey Spector with Bank of America Securities.

Jeffrey Spector, Analyst

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

Jack Hsieh, CEO

Yes, we actually did that. We did a year-by-year analysis that we presented last week. I guess I'll give you the fundamental building blocks that we look at as it relates to getting leverage to dial down into that low 6x debt-to-EBITDA range. You could consider that the assets that we plan to dispose or give back, I referred to, would result in a 100 basis point decline in our leverage statistic, the NOI increase over this period of time, which includes accounts for about 60 basis points of reduction in our debt-to-EBITDA ratio. Of that 100 basis points, approximately 60% of that is related to that $70 million of incremental rental revenue that Doug and I talked about. And the final 65 basis points of leverage reduction is accounted for in that $500 million of common stock issuance as a placeholder. So those three fundamental building blocks are what gets us down to that target level. I can tell you that the sales and giveback analysis, it's about 10 properties, plus or minus. We can't do that all at once. There's a very specific sequencing that we're going through that will take about three to four years to accomplish. The NOI that we talked about, that's also a three-year buildup, although every year, you'll see pieces of that come in. And the common stock piece is kind of at our discretion. We don't do it right away. We're going to delever just through this process. So we're very opportunistic about that. But I think what you'll see us do, Jeff, is, as we get more clarity around FFO guidance, we'll probably start to talk about specific sale transactions and JVs and lender givebacks that are actually executed or under contract, so to speak. We're in process right now, so we can't comment on it. But in the coming months, we'll be able to give real clarity around specific names of assets.

Jeffrey Spector, Analyst

Very helpful. As a follow-up, considering these key objectives and the ultimate goal you mentioned about having the cost of capital to pursue opportunities, do you think that will be achievable in a couple of years? Or if you start making progress on these objectives over the next year, will you be able to move forward sooner? It's also positive to note that on the leasing side, you continue to perform very well, which is critical.

Jack Hsieh, CEO

Yes. Look, when I joined this company, I didn't just come here to delever the company and try to sell the company, can that just be retired. I saw a great organization that can do a whole lot more of this platform, and when I looked at the plan to delever, to be honest with you, it's a pretty simple plan. It's 10 assets. It's NOI that is coming, and the common stock thing is a lot lower than probably I initially expected from the outside looking in. If we wanted to go quicker and not sell any properties that's issuing $2 billion of common stock to get us down into the low 6x area, which we would never do, make no sense from just from a dilution standpoint. So I feel like this plan gives us the best opportunity to take advantage of, I think, are going to be really interesting opportunities. In my former job, there were 20 public listed net lease companies, 20. In our space, there's basically 2 companies public that focus on enclosed shopping centers and lifestyle centers. We're one of them. And I think there's honestly going to be some opportunity in the future to look at really interesting centers in time. So my objective is to get our organization ready for that pivot when it comes, and that's what we're going to do.

Greg McGinniss, Analyst

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

Jack Hsieh, CEO

Since day one of my tenure, I've been focused on understanding our operations. On my first day, I toured three of our shopping centers, two of which are in Southern California. The following week, I visited the Santa Monica office and collaborated with the leadership team to grasp our business model. I identified a significant opportunity to encourage the organization to embrace a meaningful mission statement and corporate values that resonate beyond mere words. Additionally, I recognized that we are fundamentally in the hospitality sector. While we typically refer to shopping malls, our true customers are our tenants and the visitors to our properties. These individuals have many alternatives, such as online shopping or different locations, so we must create an inviting environment with the best selection of merchandise. This includes attractions like Dick's House of Sport, Lifetime Fitness, and diverse dining options. Ultimately, our goal is to increase foot traffic and extend the time visitors spend in our centers. I shared this hospitality-focused vision with the company through town hall meetings and reiterated it during our recent property management conference in Scottsdale, which was attended by 200 people from the property level. We aim to redefine our approach; it’s not just about having anchors and shops, but about addressing the needs and desires of our customers. I also implemented several initiatives, including a property ranking system with classifications like fortress assets and Steady-Eddie, along with establishing a formalized capital allocation process. I'm reviewing our lease procedures to expedite rent commencement saves, assessing a CRM, and exploring offshoring concepts and AI initiatives to enhance our efficiency and better meet customer demands, ultimately driving more traffic to our centers. Although I'm only partially through my visits, I have a clear vision of our direction, and I believe it is attainable.

Greg McGinniss, Analyst

And I guess in thinking about the assets that you're looking to sell and not give back, are those generally in that, I guess, as you phrased it, that the Eddie category? Or are there some stronger assets in there that you're looking to offload to maybe control dilution a little bit?

Jack Hsieh, CEO

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

Scott Kingsmore, CFO

Yes, Greg, I'll take it, Scott here. We continue to face challenges in the broader marketplace here in Santa Monica. It impacts our progress and tenancy. We have a difficult underlying capital structure, which led us to make the decision to default on the loan in early April. To frame the financial impacts, the asset is about $0.01 FFO dilutive and increases our leverage by about 20 basis points. Beyond that, we are not in a position to provide any more information, as it is subject to ongoing discussions with our lender.

Greg McGinniss, Analyst

So is it not worth the investment anymore at this planned development side? Or did that pause?

Scott Kingsmore, CFO

Yes. Again, challenges in the marketplace and a challenging underlying capital structure led us to the conclusion. I got to leave it at that, though, Greg.

Samir Khanal, Analyst

Jackson, I'm curious about the current interest rates. How realistic is the goal for asset dispositions at this time? I know you mentioned 10 assets, but are you referring to a long-term timeframe rather than the next 12 months? I'm trying to understand the timeline for asset sales.

Jack Hsieh, CEO

Yes. I mean we assume sort of in our plan, a base rate assumption of 6.5% over the next three years. So I'm sure that it could be higher, it could be lower. And the assets that we're considering, we think, I would describe some as having very attractive below-market financing that is assumable. So that would be maybe one category. There would be another category that might be unencumbered properties that obviously would have an impact to current financing rates. And then I would describe another category as I haven't talked about too much, we have a handful of freestanding, very monetizable outparcels that we could sell that include tenants like Costco, Home Depot, BJ's, Lowe's, Walmart, which would probably not be something we do in the short term, but perhaps possibly later in the kind of timing cycle as we move forward. So it's not just centers. There are a lot of different asset opportunities that we have, and we're very cognizant of rates, but just so you know how we built our assumptions, we sort of use a 6.5% base rate on any refies.

Samir Khanal, Analyst

Okay. Understood. Now, Doug, could you provide some insights on the situation with Express and the store closures? What are your thoughts on filling these vacant spaces? What has been the interest level regarding this, and when do we anticipate starting to fill these spaces with new tenants?

Doug Healey, Senior Executive Vice President of Leasing

Yes, as you know, we and our peers faced significant challenges coming out of COVID, with the pandemic accelerating store closures and bankruptcies. If you consider Express, they were highly regarded in the industry and secured prime locations in some of our best malls, which included some of the most desirable spaces. While closures and bankruptcies are not favorable, the space we are set to reclaim is in our top properties, located in prime areas. I think about regaining space at Kings Plaza, Danbury, FlatIron, Freehold, and Green Acres, all of which are very well-leased properties. Available space is limited. We see this potentially as a positive turn, but it will be a lengthy process, similar to what we experienced after COVID. Our team is diligently working to find replacement tenants.

Jackson Hsieh, CEO

Samir, I'd like to add my thoughts. I'm Jackson, and I'm focused on filling vacancies. One reason we do this is aligned with our mission statement: we intend to allocate available proceeds for redevelopment or capital back into our existing centers that can enhance net operating income. Consider two concepts: Dick's House of Sport is remarkable. I visited their new store at Ross Park Mall in Pittsburgh, and it's impressive. I also saw their store in Rochester at Eastview Mall. We are currently discussing several properties with them in our existing portfolio, and honestly, I'd love to partner on eight to ten locations, if not more. While these initiatives are costly, I believe they will attract additional regular traffic. It's one of the best concepts I’ve encountered. Lifetime Fitness operates in three of our centers, and they were my top tenant at my previous company, so I’m familiar with their operations. We aim to have more of their locations in our centers as well. However, all of this requires capital investment. As we move forward, our focus will be on creating a robust retail portfolio through reinvestments in our centers. I hope that clarifies our approach.

Floris Van Dijkum, Analyst

Jackson, welcome on board. I have a question, and perhaps it's more directed towards Doug. As a follow-up on the Express situation, I know that you’re losing 15 stores. What was the amount that Express was paying? In your opinion, what opportunities are there for market adjustments? You've mentioned that these stores are in good locations. What kind of potential upside can we anticipate once those spaces become available again?

Scott Kingsmore, CFO

Yes, Floris, I'll take it, and then Doug will correct me where I'm wrong. Those 15 stores or whatever the number ends up being, it's high-quality real estate. I don't want to get into specifics about what they were paying. I kind of gave you the aggregate exposure for the company to give you some kind of sense, and they roughly averaged 8,000 to 10,000 square feet. We're taking the space back. I think fundamentally in the backdrop of a very, very strong leasing environment. So it's not like we're in the heart of COVID when we're facing a spate of continued bankruptcies and retailer failures. So we hold out some optimism we'll be able to backfill and replace that rent in relatively short order. But we have a task ahead of us. As I mentioned, it's a 50 basis point loss in occupancy, and you can do the math on that. So we definitely have some work ahead of us, but the leasing environment is strong. Doug, anything?

Doug Healey, Senior Executive Vice President of Leasing

Yes. And I think the real story here, Floris, is, yes, it's about the economics for sure. But it's replacing underperforming sort of obsolete tenants with new depth and breadth. And that's what we do. And I think Jack made some really good points when he talked about Dick's House of Sport, Lifetime Fitness. I mean you think about who they're replacing. They may be replacing a JCPenney or a Sears, and we're getting newness, we're getting excitement. We're getting innovation. And I put Express right in that category. It may not be an anchor, but it's going to give us the ability to refresh our centers and diversify our centers. And that really is our goal.

Floris Van Dijkum, Analyst

I have a follow-up question that may be strategic for Jackson or Scott. One interesting aspect is the potential to buy out your partners in joint ventures, which would obviously require capital. Would you consider buying out some of your partners in these ventures, especially since some of your best assets are held there? Would you think about using equity or swapping equity for a remaining stake in those assets?

Jack Hsieh, CEO

I'll take that now. That's not part of the current plan. If an opportunity comes up in the future where the asset is valued at the right cap rate and we have a competitive cost of capital, we would definitely consider it. I want to simplify the business; consolidating joint ventures on our top properties does that, but it needs to make economic sense. I don't think we're at that point yet regarding market conditions and the transparency of cap rates for 8-plus centers. Additionally, our cost of capital isn't in the best position at the moment, so we're actively evaluating that.

Vince Tibone, Analyst

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

Jack Hsieh, CEO

Vince, this is Jackson. Your report was quite amusing when it came out last week and was generally correct, although the specifics about the assets were inaccurate. However, the overall idea was accurate, so thank you for sharing that. We currently have 18 vacant anchor locations in our portfolio. In centers that fall into our third category, we likely won't focus on those vacant anchors. On a positive note, we recently agreed to purchase a vacant anchor location for one of our middle-tier assets. What’s most important for us is determining what benefits the center most. For instance, we spent a considerable amount of time considering a densification option for the end cap of one property but ultimately decided to go in a different direction by adding a Dick's House of Sport. I genuinely believe that's a better choice for the center and aligns with our current objectives. There may still be densification possibilities in another area of that property, but at present, I'm not satisfied with our balance sheet. Thus, we will allocate our available capital to enhance the strength and performance of our fortress and Steady-Eddie properties. If opportunities arise to monetize parts of our developments, we will certainly consider those. That said, at FlatIron, the situation is much more complicated, with excellent entitlements from the town, and we will pursue a more vertical development there as it is warranted.

Vince Tibone, Analyst

And then just another one on the balance sheet for me. I mean, do you plan to unencumber any assets in the near term just to improve the unencumbered pool and potentially allow for more unsecured borrowing options down the road?

Jack Hsieh, CEO

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

Linda Tsai, Analyst

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

Jack Hsieh, CEO

Success for us would be achieving $1.80 per share of FFO three to four years from now with a leverage level in the low 6x. We have made certain interest rate assumptions, and various timing factors can come into play. I consider this to be our definition of success. Additionally, I want to mention the 100 basis points of NOI improvement, which will assist us in both leverage and FFO. I've emphasized to the team that the majority of our portfolio has recovered to pre-2019 NOI levels, meaning pre-COVID levels. There are six properties on the Eastern Seaboard that are lagging behind, collectively missing about $39 million in NOI. I believe there are opportunities to address this gap, and it will be crucial for our NOI improvement efforts to help us reduce leverage and enhance earnings. Plans are already in place for these six properties to reach or exceed 2019 levels within the next three years.

Linda Tsai, Analyst

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

Jack Hsieh, CEO

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

Linda Tsai, Analyst

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

Scott Kingsmore, CFO

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

Doug Healey, Senior Executive Vice President of Leasing

No, I agree. We're very cautious when we prepare our watch list, meaning we'd prefer to keep a close eye on things rather than miss any important developments. I would say that our current watch list is probably 30% of what it was before COVID in 2019, in terms of both square footage and the number of tenants.

Alexander Goldfarb, Analyst

Jackson, welcome to Macerich. I have two questions for you. First, you've looked at Mace's past history, and I know you were part of the GGP restructuring. This company has attempted two different recapitalizations and has tried to implement what you've proposed twice before, but it hasn’t been successful. I'm curious about the $2 billion of equity; our analysis shows it wouldn't significantly dilute the FFO but could certainly place you in a strong position, especially with your energy and ideas. Can you explain how your current approach, which appears similar to what previous teams have attempted, will succeed this time rather than just focusing on the $2 billion to improve the balance sheet now and capitalize on what seems to be one of the best retail environments we've seen, as shown by your strong leasing results in the first quarter?

Jack Hsieh, CEO

I would describe the situation by noting that I can only share my perspective on it today based on my previous experience. The re-ranking of our properties is a key aspect of our approach. I see it as having a third category of opportunities. If I were to raise equity to adjust the balance sheet, it would be counterproductive because those assets likely won't be part of our long-term portfolio. However, they are crucial in the short term as the cash flow they generate supports many other initiatives within our strategy. Focusing solely on issuing equity could result in adding too much investment in assets that aren't aligned with our long-term strategy, as they won't become thriving retail centers. When we evaluate our assets, we consider metrics like net operating income and funds from operations per share, along with factors such as traffic, sales per square foot, and the competitive positioning of each center. Tenant demand, anchor strength, and the physical quality of the property are critical, as are market dynamics like shrinkage and crime rates. We also align with our joint venture partner. Our ranking system includes unique factors that can negatively affect a property's ranking, such as excessive debt on a ground lease, although the potential for development can improve its standing. Out of the 44 properties, some simply don't rank well for us. Therefore, raising equity to adjust the corporate structure wouldn't direct funds to those properties anyway. This approach aims to be less dilutive, allowing us to achieve our goals while investing in areas that will have the greatest positive impact on us and our shareholders.

Alexander Goldfarb, Analyst

I understand, Jackson, that you've covered this company for over 20 years, and I appreciate a lot of what you do. I think your team has led in certain areas, especially with the execution of Phoenix alongside Westcore. However, the balance sheet has been a significant issue that has been addressed in various ways. That's why I continue to focus on equity, and I'm pleased your figures align with our $2 billion expectation. Regarding the dividend, it has been an area where the company has overpaid previously. With upcoming asset sales and impairments that will generate tax shields, I assume the dividend will be determined over time. Are you confirming that the current dividend level will not change?

Jack Hsieh, CEO

I think the dividend level we have is appropriate and I don't believe we need to reduce it. Clearly, we won't be increasing it significantly while we are working through this initiative. To give you an idea, we expect to end at $1.80 plus FFO share, with low leverage. Our payout ratio remains reasonable compared to our current payout.

Michael Mueller, Analyst

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

Jack Hsieh, CEO

Mike, it's Jackson. That includes the four to six givebacks. So it's roughly about 10.

Michael Mueller, Analyst

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

Jack Hsieh, CEO

I would say the largely pretty similar. I would say it's very similar. I mean I think the way we've analyzed it is like the go-forward portfolio will have much higher sales per square foot, much higher permanent occupancy than we had today. Better growth profile, yes. It's really kind of focusing on what I call super thriving centers. That's what we can end up with. I think we have time for one more question, operator.

Operator, Operator

Next question comes from Craig Mailman with Citi.

Nick Joseph, Analyst

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

Jack Hsieh, CEO

Nick, it's Jackson. Right now, our strategy is to position the company for growth, so we are navigating through various initiatives. We won't achieve this by reducing general and administrative expenses. If we want to revive the business, we'll need to find efficiencies in the process improvements we're currently examining. There are many opportunities to streamline certain workflows, which will provide people with more capacity to enhance the business instead of getting bogged down by lengthy processes. Our primary objective is not about downsizing to grow; we believe that our actions will enable us to achieve a competitive cost of capital to leverage this platform effectively.

Operator, Operator

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

Jack Hsieh, CEO

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

Operator, Operator

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