Macerich (MAC) Q4 2024 Earnings Call Transcript

Macerich (MAC -8.95%)
Q4 2024 Earnings Call
Feb 27, 2025, 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the fourth-quarter 2024 Macerich earnings conference call. At this time, all participants are in a listen-only mode. [Operator instructions] Please be advised that today’s conference is being recorded.

I would like now to turn the conference over to Samantha Greening, director of investor relations. Please go ahead.

Samantha Greening — Director, Investor Relations

Thank you for joining us on our fourth-quarter 2024 earnings call. During this call, we’ll be making certain statements that may be deemed forward-looking within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995, including statements regarding projections, plans, and future expectations. Actual results may differ materially due to a variety of risks and uncertainties set forth in today’s press release and our SEC filings. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included in the earnings release and supplemental filed on Form 8-K with the SEC, which is posted on the Investors section of the company’s website at macerich.com.

Joining us today are Jack Hsieh, president and chief executive officer; Dan Swanstrom, senior executive vice president and chief financial officer; and Doug Healey, senior executive vice president of leasing. And with us in the room, we have Brad Miller, SVP of portfolio management. And with that, I turn the call over to Jack.

Jack Hsieh — President and Chief Executive Officer

Thank you, Samantha, and good afternoon. Over the last year since joining Macerich, I have become increasingly confident in our mission to operate and own thriving retail centers that bring our communities together and create long-term value for our shareholders, partners, and customers. We launched Macerich’s path forward early in my tenure, and I’m pleased with our steady progress. This clear executable plan is designed to accomplish three key objectives over its five-year horizon.

One, simplify the business; two, improve operational performance; and three, reduce leverage. During 2024, we were successful in simplifying our business through selectively consolidating joint venture interests at Arrowhead Town Center, South Plains, Los Cerritos, Washington Square, and Lakewood. Our equity offering in late 2024 derisked that portion of our plan, and the refinancing of Queens Center is well below our target refinancing rate. We’re well underway on loan givebacks and mall sales and are now focused on outparcel land and select open-air retail sale opportunities around our shopping centers.

A big focus of mine has been to improve internal processes and restructure many aspects of our approach to asset management, leasing, property management, portfolio management, and development, which will best position the company to drive improved operational performance and to deliver long-term value creation. I’m pleased with the progress on several key initiatives to date. Our process improvement committee has been successful in implementing a new leasing dashboard tool, whereby leasing, asset management, legal, tenant coordination, construction, and senior leadership all collaborate seamlessly together, which has vastly improved our visibility and efficiency around leasing and tenant coordination. Our asset management and portfolio management teams are now a stand-alone group whose mission is to be the asset owner at Macerich, responsible for driving cash flow and long-term value through operations utilizing our leasing, development, and property operations teams.

Our asset and portfolio management teams led the effort to create five-year ArcGIS business plans for each asset, which is now a bedrock tool that we use to evaluate leasing and capital decisions. The permanent specialty and department store leasing teams are all now under one leadership and reporting structure. Property operations, marketing, and development are also under a new leadership structure. Working collectively with our asset management, portfolio management, and leasing teams, we have ranked all tenant spaces throughout our portfolio with an A through F grade and determined market rents for each particular space.

An important aspect of our path forward plan is to take advantage of driving more incremental revenue out of our portfolio through leasing vacant, temporary leased, and under market A and B and C rated spaces within our portfolio. Each of these organizational process, analytical, and technological enhancements provide our team with the strategic roadmap and tools to drive leasing and NOI over a multiyear horizon. With respect to the NOI component, our leasing team is hyperfocused on what needs to get done in the next 2 years. To help frame the leasing initiative, in 2023 and 2024, we averaged approximately 3.75 million square feet of annual lease volume.

We are targeting an average of 4 million square feet of leasing in 2025 and 2026 and focusing on creating a higher percentage of new lease deals versus renewals in our annual mix of business. New deals contribute vastly to our releasing spreads and incremental rental revenue. The effect of this shift in mix is new deals typically involve more rental revenue downtime in the range of 12 to 18 months. In 2024, we achieved 8.8% base rent releasing spreads for permanent tenants under 10,000 square feet.

New leases signed during this period were 17.6% higher base rent versus the prior period permanent rent, including vacant and temporary lease space to the aforementioned group of spaces. The releasing base rent percentage increase was over 50%. Our current physical permanent occupancy for our go-forward portfolio is 84%. We are targeting an 89% physical permanent occupancy rate by 2028.

Approximately 50% of this increase is already accounted for by our current snow pipeline of $66 million. Having the ability to forecast the longer-term impact of this change in leasing mix, coupled with continued strong leasing demand, is an excellent setup for us to achieve our incremental NOI goals for 2028. We are being very intentional in our decisions to optimizing lease outcomes and rental revenue uplift within our portfolio that aligns with our strategic financial objectives for 2028 under the path forward plan. This is a massive change in mindset and operations for the company, which has historically been more focused on managing the business to annual near-term FFO targets.

There is a compelling opportunity to get after under market and vacant A, B, and C rated spaces in our centers. Maximizing each space and their total revenue potential over the long term will result in a higher volume of tenant remerchandising, space movements, and temporary downtime in rental revenue. To recap, I feel very good about how things are progressing on our path forward plan. We’ve made substantial progress to date.

We have a clear roadmap with tools and new processes for leasing over the next 18 to 24 months and beyond, which will drive incremental rental revenue and a more improved and resilient permanently occupied portfolio. We are currently 39% complete in our leasing goals toward our plan. Our asset givebacks to lenders will play out over the next 2 years as loan maturity dates trigger on any properties. We have an identified group of outparcel, land, and malls that the team are executing sale transactions, which will continue over the next 3 years.

And we are currently funding our development pipeline, which will contribute NOI in 2026 through 2028. With that, I’ll turn the call over to Doug.

Douglas J. Healey — Senior Executive Vice President, Leasing

Thanks, Jack. We had another solid quarter and year for that matter, both in terms of leasing volumes and metrics. Sales per square foot at the end of the fourth quarter were $837, and this is up $3 compared to the last quarter. Sales per square foot, excluding our Eddy properties were $915.

Comparative sales for fourth quarter and for the year were basically flat when compared to the same period in 2023. As I’ve stated in the past, we have yet to see a correlation between sales and retailer demand as evidenced by our deal flow, both in terms of number of deals and square footage when compared to the same period last year, and I’ll get into this more in a moment. Traffic for the year was up almost 2% when compared to 2023. Most importantly, the portfolio traffic is back to our pre-COVID levels.

Occupancy in the fourth quarter was 94.1%, and — this is up 40 basis points from the third quarter and up 60 basis points from a year ago. Portfolio occupancy excluding our Eddy properties was 95.8%. In the fourth quarter, we opened 530,000 square feet of new stores. This brings our total for 2024 to 1.5 million square feet of new store openings, which is just about on par with where we ended up in 2023.

Now let’s take a look at the new and renewal leases that we signed in the fourth quarter. In the fourth quarter, we signed 223 leases for 1.1 million square feet. For the full-year 2024, we signed leases for 3.7 million square feet, which is just about where we ended up in 2023. And let’s keep in mind, 2023 was a record leasing year for us.

dating back 30 years when Macerich first became a public company. 2024 was also another year of newness for us. Once again, bringing new, unique, and emerging brands was a major initiative for our leasing team and a way for us to really reimagine and differentiate our shopping centers from our competition. To that end, in 2024, we ended up with commitments on nearly 430,000 square feet of new to Macerich brands.

Examples include Helly Hanson, Princess Polly, Mejuri, Carhartt, Seafood City, Akira, Rivian, Buck Mason, Celine, Popmart, and Mendocino Farms just to name a few. So once again, a very solid volume of leases signed in 2024. However, that’s what we’ve done in the past. I like to focus on the future in our current leasing velocity.

And as I’ve said before, at Macerich, we review deals every 2 weeks. And year to date in 2025, we’ve reviewed 55% more deals than we did during the same period last year. But most importantly, we reviewed three times the new deals and over five times the new deal square footage than we did during the same period last year. And once these deals are reviewed and approved, they go to lease, get signed, and eventually become part of our signed-not-open pipeline.

I realize it’s early in the year, but the statistics are very encouraging and indicative of the healthy retailer environment that exists today. So far, neither sales nor the macroeconomic environment seem to have had any effect on retailer demand. I also believe this is a testament to Macerich’s must-have portfolio. Turning to our lease expirations.

To date, we have commitments on 63% of our 2025 expiring square footage that is expected to renew and not close, with another 21% in the letter of intent stage. So between commitments and LOIs, we’re just about 84% done with our 2025 lease expirations. In the fourth quarter, we had only four tenants in our portfolio filed bankruptcy in all of 2024. We had just 13 tenants in our portfolio file bankruptcy, totaling only 54 stores, 26 of which were the Express bankruptcy.

And of the 26 Express bankruptcy that we had in our portfolio, only nine close. And of that nine, we have commitments or are negotiating LOIs and 75% of that closed square footage. Turning to our signed-not-open pipeline. At the end of the fourth quarter, we had 104 leases signed for 1.2 million square feet of new stores, which we expect to open between now and into early 2028.

In addition to these signed leases, we’re currently negotiating leases for stores totaling just under 875,000 square feet, which will also open during the remainder of 2025 and into 2026, 2027, and early 2028. So in total, that’s over 2 million square feet of new store openings throughout the remainder of this year and beyond. And this pipeline of new store openings now accounts for $66 million of incremental rent, of which $27 million will be realized in 2025 with the remainder being realized between 2026 and into early 2028. And with that, I’ll turn the call over to Dan to go through our fourth-quarter and year-end financial results.

Dan Swanstrom — Senior Executive Vice President, Chief Financial Officer

Thanks, Doug, and good afternoon. I’m pleased to be participating in my first earnings call with the Macerich team. I’ll start with a review of fourth-quarter financial results. FFOs excluding financing expense in connection with Chandler Freehold, gain on extinguishment of debt, accrued default interest expense, and loss on non-real estate investments was approximately $117 million or $0.47 per share during the fourth quarter of ’24 as compared to approximately $128 million or $0.57 per share for the fourth quarter of 2023 The primary drivers of the $11 million decrease in FFO include higher interest expense and then the severance expense incurred in the fourth quarter of 2024.

$7 million of the increase in interest expense relates to the amortization of debt mark-to-market, resulting from our various JV interest acquisitions. This noncash expense is included in interest expense on our P&L. Severance expense for the quarter was approximately $5 million and is included in management company’s operating expenses on our P&L. I would note that as it relates to the amortization of the debt marks to market resulting from the JV buyouts, we expect this to have an incremental $0.09 per share reduction to 2025 FFO adjusted as compared to 2024, all else equal.

This reflects the full-year impact in 2025 versus the partial-year impact in 2024 when we acquired these JV interest. As a reminder, these are noncash interest expense items, and they roll off the P&L by 2027 at the various loans mature. Same-center NOI, excluding lease termination income, decreased 0.4% in the fourth quarter of 2024 compared to the fourth quarter of 2023. And for the full year-ended 2024, same center NOI, excluding lease termination increased 0.2% compared to 2023.

Adjusted for the negative impact of the Express bankruptcy, same-center NOI growth would be about 1% year over year. Excluding Eddy assets, this adjusted 1% growth would increase to 2.1% for the year. Turning to the balance sheet. We made considerable progress in 2024 managing our debt maturities.

We closed on seven transactions for over $1.3 billion of loans or $1.1 billion at our share. During the fourth quarter, we closed on a 5-year refinance of Queens Center at an attractive fixed interest rate of 5.4%. We just recently paid down the approximately $15 million loan or about $7.5 million in our share on Flatiron Crossing that carried a high interest rate of SOFR plus 12.25%. For the balance of 2025, we have less than $300 million at share of maturing loans, and we’ve already started to address our 2026 debt maturities with the repayment to Los Cerritos, Washington Square, and Lakewood.

We’ll provide further updates on our debt maturities as we move through 2025. We currently have approximately $683 million of liquidity, including $540 million of capacity on our line of credit. From a leverage perspective, I’m pleased to report that debt to EBITDA at year-end 2024 was slightly below eight times, which is almost a full turn lower than one year ago. and we’ve outlined our strategy to further reduce leverage to the low six times range over the next several years.

We continue to make significant progress in executing the path forward plan. In October, as previously announced, we closed on the acquisition of our partners 40% interest in the PPRT portfolio. The net acquisition price was $122 million, and we assumed our partner share of debt outstanding. We now own 100% of Los Cerritos, Washington Square and Lakewood.

This transaction is consistent with our stated objective to proactively consolidate select joint ventures and to simplify the business. In November, the company priced an underwritten public offering of 23 million shares of common stock at a price of the public of $19.75 per share for gross proceeds of approximately $454 million. We used the net proceeds from this upsized offering, together with cash on hand to repay the $478 million Washington Square mortgage loan that had an interest rate of SOFR plus 400 bps and that had a 2026 maturity. This transaction is consistent with our stated multipronged strategy to reduce leverage and improve the balance sheet.

In December, we closed on the sale of the Oaks for $157 million. We used the net proceeds from this sale to repay the $148 million loan in this property that had an effective interest rate of approximately 7.5% and then had a 2026 maturity. We also closed on the sale of Southridge for net proceeds of $4 million, and we are currently under contract to sell Wilton Mall for $25 million, which is expected to close in the first half of 2025 subject to customary closing conditions. This asset is unencumbered.

These sales transactions are consistent with our stated disposition plan to improve the balance sheet and refine our portfolio. To recap on the path forward plan, significant progress to date on our three key pillars to reduce leverage. One, Jack provided a commentary on the NOI growth component and the roadmap for the team over the next 2 years to execute on this prong of the leverage reduction plan. Two, we have achieved the equity issuance component of the plan.

And three, we have made substantial progress on the sales and givebacks component of the plan and have identified a clear path to achieving our $2 billion disposition target. To date, we have completed almost $800 million. This includes Country Club Plaza; Biltmore; The Oaks; and Southbridge, which are closed; Santa Monica Place, in which the loan encumbering this property is in default; Wilton, which is under contract in the Atlas Park, which is currently being marketed for sale. And then we have identified internally four assets totaling about $350 million to $400 million for sale or giveback over the next 1 to 2 years.

That brings us to almost 60% of our $2 billion target. The remaining 40% of the plan includes the planned sale of one enclosed mall over the next year and the sale of $500 million of outparcels, freestanding retail, nonenclosed mall assets, and land. On the $500 million, we expect to close $100 million to $150 million of sales in 2025, which we anticipate will be more weighted toward the second half of the year, and then we expect the balance of the $500 million in sales to close in 2026 into the first half. We’ll provide further updates on these sales as we progress through the year.

With that, I’ll turn the call back over to the operator.

Questions & Answers:

Operator

Thank you. [Operator instructions] And the first question will come from Floris Gerbrand Van Dijkum with Compass Point. Your line is open.

Floris Van Dijkum — Analyst

Hey. Thanks, guys. So a couple of questions. Let me start with same-store NOI.

I know you haven’t given any guidance. But if I look at the SNO so that’s gonna hit in ’25, Dan, I think it’s around $27 million of the $66 million existing pipeline that you’ve outlined, that would appear to be 3% growth. I guess it depends a little bit on the timing of that. But again, with the fixed rent bumps, etc., it seems like your same-store NOI growth in ’25 is gonna be significantly improved over ’24.

Am I missing something?

Jack Hsieh — President and Chief Executive Officer

Hey, Floris. It’s Jackson. I’ll take this first. So I tried to give reference around the totality of new leasing that’s happening and the frictional downtime.

When we either take out a temporary tenant or at least permanent and revise upwards for a better tenant, it’s gonna pay more rent. That’s basically a loss of rental revenue. Now that’s offset by renewals and the timing of the snow pipeline coming through. The way we’ve modeled this, it’s gonna be candidly more flat for the next couple of years and then stair step up in ’27 and ’28, given the profile of how this is all gonna model out.

So when I look at same-store NOI and candidly FFO over the next couple of years, that’s not gonna give you the real answer on our progress. And what really will start to show progress is I mentioned 39% of our leasing goals that relate to cost of occupancy or rent are achieved, and so we’ll give updates as we move along. But as that percentage goes up, you should have confidence that all that rent will start to come online as it churns through vacant, temporary leased, and what I call low-performing permanent tenants that we have targeted to take out of the portfolio.

Floris Van Dijkum — Analyst

So, Jack, just to clarify. I think you’ve indicated that you’ve got about 17% or 18% spreads on your new leases. And you’re — presumably, does that also mean that if you’re assigning those new leases at similar occupancy cost ratios as your existing rents, that sales on those new leases are gonna be, call it, 18% to 20% higher than your existing portfolio? Should we start to see some of that filter through in your improved sales numbers in the portfolio?

Jack Hsieh — President and Chief Executive Officer

I think you’ll see it — well, first of all, too, I referenced that 50% number. So that includes tenant under 10,000 square feet, where there’s obviously a big opportunity for leasing. If you include vacant, temp tenants, and perm through 2024, that releasing spread was over 50%. We have a meaningful amount of vacant and temp A, B, and C class rated space in our portfolio.

You’re probably asking like, how do we get that? Well, if you’re running a company based on annual budgeting targets and not looking out on how leasing impacts forward future performance, that’s how you get there. You’ll get — you bump along at 3% to 4%. You’re gonna keep — your temporary tenant percentage will not go down because you wanna keep that rent in place. You’ll probably keep tenants that are less desirable permanent tenants in place.

And we’ve got opportunity in our better centers just to kind of redo that, and that’s where I talk about this higher percentage of mix. Now the net result of that, you may see some quarters when it goes up, but it also may go down. And — but this portion of the plan, it’s almost like we’re treating it like we’re a private company because there’s a big opportunity to capture a meaningful spread of rental revenue if we do this. We haven’t provided the details of it, which we plan to lay out later this year in this NOI bridge, but it’s a pretty compelling opportunity.

And that’s — the result of it is gonna be more noisy same-store NOI and probably FFO from period to period.

Floris Van Dijkum — Analyst

Let me ask my second question if you don’t mind. As I’m looking at — obviously, you still have some expensive debt, in particular, South Plains at almost 8%. I don’t know whether you’re gonna keep that one or not. But you’ve got a really attractive development pipeline Green Acres, with, I think, 13% returns.

That’s $130 million if I’m not mistaken. And then Scottsdale, 17% returns on that. Wouldn’t it make sense to fund all of that with equity including the debt pay down simply because it’s accretive relative to the 7.1% implied cap rate you’re trading on? Or how do you think about that? Or are there other opportunities that you see where that might make sense?

Jack Hsieh — President and Chief Executive Officer

I mean you could choose to do that, and it’s obviously mathematically accretive to issue equity to fund that. But at this point, a concept on issuing equity is if the opportunity arises, where we can consolidate a JV or there’s some other accretive use, that could be paying down development pipeline with equity, buying a property, something like that. So — but outside something like that, we feel like we’ve got the equity needs in place. We’ve got enough free cash flow to execute the plan after dividends and interest.

So yes, but you’re right, it would be mathematically accretive to use equity to finance the developer pipeline, long-term equity.

Operator

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

Craig Mailman — Analyst

Hey. Good afternoon. Hey, Jack, you just — you touched on the new dashboard and having 5-year August runs now kind of the better process put in place. Is there any early kind of quantification of how that’s helping you from the more efficient process turning into less cost on legal or quicker gestation periods.

Kind of anything around that, that would be helpful to give some tangible.

Jack Hsieh — President and Chief Executive Officer

OK. Thanks, Craig. Well, some of the — the comments that Doug talked about, what we’ve seen year-to-date, I think that’s partially the environment, but partially us having the tools to join what space to go after and how to do it. When I first got here a year ago, when I went to review a lot of properties, did on-site visits, one of the consistent themes that I heard from our leasing team, every time I went to a new property, met with the leasing team, asset management, development, on-site manager, kept hearing time and time again, the leasing team spent so much time in the rebudgeting process that this company did, which was typically three times a year.

There were three rebudgeting forecasts throughout the year. And the amount of time that it took for them to stop what they were doing, reforecast their pipeline, apply new market rents to different space that they were focused on took up a lot of time. The second thing that took us a lot of time was there was no system at the company to communicate the current status of discussions with tenants, which kind of shocked me. So everyone had their own spreadsheet, their own list, and there were hours and hours spent by people on conference calls trying to update national tenants across our regions, where people are located in terms of the leasing team.

And so when you couple like the reforecasting coupled with the lack of visibility, there are thousands of manhours at Macerich were spent on things that were not driving future revenue opportunity. If you fast forward today, this leasing dashboard is effectively a CRM for us. And so at any given time, Doug, myself, Brad can pull up or an asset manager can find out a space that’s designated to leasing rep, where that last conversation was, what the target rent was. And that tenant can be seen by everyone in that conversation, everyone in the company, whether it’s tenant coordination, asset management, legal.

And we’ve got a quarterly review process now where — and it’s really driven by asset management, where they can basically go through a leasing plan and say look at Space C10. The last comment on that was like 3 months ago. Well, that’s really not gonna be very effective if we’re targeting C10 to be leased on time over the next 2 years. So the result of all this is, I think there’s tremendous efficiency.

It’s creating more opportunity for boots on the ground to achieve these targets that we’re looking for. And I mean, Brad, you’ve been here for a long time. He’s in portfolio. You’re the architect of a lot of the old process.

Can you tell me what you think, efficiency-wise?

Brad Miller — Senior Vice President, Portfolio Management

So, right, going from an annual budget process of having annual lease goals and revisiting those annual goals three times a year to now having a five-year plan where we get visibility into the leasing progress really on a daily basis and the shifting of resources is producing results. I mean as Doug mentioned, it’s early innings this year, but we’re seeing good progress, and we know exactly where we need to be and the 39% completed to us on track to hit our goals.

Craig Mailman — Analyst

That’s helpful. And then maybe the follow-up. You guys are effectively raising your annual leasing goal by that 250,000 square feet. How much of that is your capacity kind of improvement now that some of these processes in place versus just the amount of demand that you’re seeing and the ability to get some of that through the door?

Douglas J. Healey — Senior Executive Vice President, Leasing

Craig, it’s Doug. I’ll take that one. Yes. We’re obviously benefiting from a healthy retailer environment that has persisted really over the last couple of years, and we don’t see any change to that in the near future.

So that’s a huge tailwind for us. But in terms of the processes that Jack and Brad were just talking about, we have a very clear path to where we need to be at the end of 2028. In my world, we need to be — where we need to be by the end of probably 2027 to get that — or 2026, excuse me, to get all that revenue online by 2028. So we’ve done a few things internally, and I won’t get into the nitty gritty, but Jack did allude to it.

We brought all anchor store leasing and all specialty leasing under one roof. So whereas before, there was sort of silos setup. Now all revenue is coming under me. And my permanent leasing people are working with our specialty leasing pool are working with our department store people to make sure we get to that end goal in 2028.

And I think one of the most important things we’ve done, and Jack talked a little bit about this, is we’re laser-focused on permanent leasing. Not to say we’re not focused on specialty leasing, we can’t let that go. But we’ve got a bunch of specialty leasing people on site that do nothing but fill space temporarily. So the fact that they’re now in our world, they’re acting more like permanent leasing people.

So while their focus is still on specialty, in their mind, they’re aligned with permanent leasing goals, which means where we need to be by 2028. So it’s those little things that we’ve done internally, I think, account for the velocity that I alluded to earlier in my opening remarks.

Craig Mailman — Analyst

OK. Thank you.

Jack Hsieh — President and Chief Executive Officer

Thanks, Craig.

Operator

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

Linda Tsai — Analyst

Hi. Thanks for taking my question. Jack, I appreciate the systematic rigor you’re proliferating at Macerich. I know you introduced the same types of processes at Spirit, too.

My question is SNO as a percentage of NOI, how should we think about the growth rate in ’25 versus ’24 and ’26 versus ’25?

Dan Swanstrom — Senior Executive Vice President, Chief Financial Officer

Linda, it’s Dan. We had outlined in terms of the total SNO for 2025 is just, again, taking of the $66 million of SNO. 2025 would be $27 million of that $26 million — or sorry, the $66 million. And what was the second part of your question, in comparison to what?

Linda Tsai — Analyst

I was just trying to think about it like SNO as a percentage of NOI and what those growth rates could look like. How much that grew in ’24 versus ’23, ’25 versus ’24, ’26 versus’ 25?

Jack Hsieh — President and Chief Executive Officer

I would say, Linda, here’s how I think about it. Rather than give you a percentage an important part, I’ve mentioned to you like this mix of more new versus renewal. If you looked at our historical 5-year average of tenants under 10,000 square feet, typically, that ratio is about 34% new leases versus renewals in — over that 5-year period. In ’25 and ’26, we’re targeting 45% new tenants in our game plan.

So that’s gonna automatically obviously increase the SNO pipeline substantially if we’re able to accomplish this, which we believe we are. So I don’t think it’s gonna have — it’s gonna be quite different than historical because it’s very intentional about attacking vacant, I’ll call it, nonproductive A tenants that can be upgraded, some under market, some temp. There was a surprising amount of opportunity within our 20-yard lines of the main mall, where it’s just like why do we keep these tenants here? Why are they here? Well, we’re focused on annual FFO targets and budgets and reforecasting. We can’t kick them out.

It’s the wrong thing for you, for the center, and we can get and make more money. So if you think about what we’re trying to solve for in 2028, if we do what we say, we’re gonna end up with a much more resilient, permanently occupied portfolio with strong vibrant tenants. That’s the result of this. And we can have better merchandising mix, which will drive traffic.

We can get rid of some of the legacy tenants that are candidly not performing well or at risk, which is something that was harder to do under the way we used to do things, which were kind of within the annual period. So to answer your question, the SNO is gonna go up. It’s just — as we kind of crank through this, we can already see it. And eventually with the 12 to 18 months downtime, that will come in on time for our purpose in 2028.

Linda Tsai — Analyst

Thanks. And then what’s the spread difference between the new rents and the renewals?

Jack Hsieh — President and Chief Executive Officer

So for under 10,000 square foot, it’s — that 8.8% versus 17. So I think — what would be the renewals. 8%?

Dan Swanstrom — Senior Executive Vice President, Chief Financial Officer

5.8%.

Jack Hsieh — President and Chief Executive Officer

5.8%, sorry. But once again, mix has a huge variance of these numbers, the mix. And we’ll start to disclose going forward much more detail about leasing mix because you obviously need it. If I just give you 8.8%, that doesn’t really tell you too much.

So we’ll start to give you more details as we move forward at the end of the first quarter on the mix that we’re talking about. I think it will be helpful for you.

Linda Tsai — Analyst

Thanks. Just one last follow-up related to that. In leasing up the A, B and C space that you didn’t focus on previously, what’s the weighting of those spaces, like percentage of A versus B and C? And then are you able to turn C spaces into Bs and B spaces into As?

Jack Hsieh — President and Chief Executive Officer

It’s less about — I’ll let you go, Brad.

Brad Miller — Senior Vice President, Portfolio Management

Sure. I mean, like in our plan, in our go-forward plan, 90% of our leasing activity is on A, B and C spaces. So we’re still — it’s still strong spaces where the tenant demand to lease these up and up plan.

Operator

And the next question will come from Jeffrey Spector with Bank of America Securities. Your line is open.

Andrew Reale — Analyst

This is Andrew Reale on for Jeff. Thanks for taking our questions. Just on the consumer. Last quarter, you pointed to this shift in discretionary spend away from goods and more into services.

Just wondering if you’ve seen any capitulation back toward goods-oriented spend? And what your overall thoughts are on the outlook for discretionary retail in 2025?

Douglas J. Healey — Senior Executive Vice President, Leasing

Hey, Andrew, it’s Doug. It’s a great question. And I did talk about that. Coming out of COVID, everybody was buying things.

I mean they’re remodeling their homes. They were buying shoes, they were buying apparel, all stuff that they couldn’t do for 18 months. And that’s why we saw huge comp sales across our portfolio over the last 2.5 years. But you’re right, I did talk about the fact that consumer behavior was changing, and it was.

People for the first time felt more comfortable to socialize. They felt more comfortable to go on vacation, to go on cruises, to go to concerts. And we’re still seeing that. But now you think about it, this has probably been going on for the last 18 months, say.

Now it’s time for replacement. So I think the keyword on a go-forward basis is replacement, and replacing those products that were bought coming out of COVID, and that’s what we saw in the fourth quarter for sure. In November and December, that’s what we started comping up. But I think that sort of the buzzword around the industry right now is replacement.

So I think you’re gonna see that all cycle back to a little bit more of normality.

Andrew Reale — Analyst

OK. And then just a quick follow-up. Of the 2025 expirations, I think you said in your remarks, 84% of those spaces are now committed or under LOI. Just curious, how does that compare to this time last year? Thanks.

Douglas J. Healey — Senior Executive Vice President, Leasing

Just a little bit ahead of where we were last year.

Andrew Reale — Analyst

OK. Thank you.

Operator

And the next question will come from Steve Sakwa with Evercore. Your line is open.

Manus Ebbecke — Evercore ISI — Analyst

Thanks. This is Manus on for Steve. It looks like you’re making some really good progress on all fronts for the path forward. Are there any areas, Jack, that you feel like are slower than what you would have expected now that we sit here in 2023 in February — 2025? And maybe if you could touch on what you believe maybe is the biggest risk going into ’25 that could impact the execution of the path forward? That’s like the first question.

Jack Hsieh — President and Chief Executive Officer

Yes. I mean I’d say we’re very comfortable with the range, debt-to-EBITDA and the earnings ranges we put out last year for the plan after going through the detailed business plans. I think one of the things that came out of the ArcGIS exercise was that the anticipated landlord work and TA costs were higher given the percentage of new tenants we are focused on. So that was one area that was probably more of a negative surprise for us.

We’ve obviously had a lot of positive surprise as well. The equity, the financings, and some of the sales. The other is one area that could be a negative for us or a headwind is if there’s any delay in our development pipeline. So Green Acres, we’re on track.

Nordstrom is on track. There is some delay at FlatIron, so we’re trying to move — continue to move forward in that project as quickly as we can. But absent that, we have a very clear idea of what we need to accomplish. And we feel like we’ve — this management reorganization and people reorientation with the systems, it’s quite staggering how big of an impact this is having now, telling you.

So versus the past. So I’m confident in what we can do, and we’re just gonna get it. We’re just getting after it.

Manus Ebbecke — Evercore ISI — Analyst

That’s perfect. I appreciate that. And it’s actually a perfectly translating into my second question, which was gonna be on capex. You just mentioned that based out of these ArcGIS run exercise, it looks like that is maybe trending higher.

So I just wanted to clarify, is that maybe now essentially translating in capex for ’25 as a percentage of NOI or however you wanna base it off potentially trending higher than previously anticipated or higher compared to ’24? Any color there would be super helpful.

Jack Hsieh — President and Chief Executive Officer

I mean, hopefully, we can beat those assumptions because they are just assumptions right now. But if we’re able to achieve the level of velocity that we talked about, 4 million square feet, 45% new under 10,000 square foot tenants, that’s gonna incur theoretically more capital costs than ’25 and ’26 versus historical because we’re running at higher volumes and new — a percentage of new tenants versus renewals.

Dan Swanstrom — Senior Executive Vice President, Chief Financial Officer

Yes, I would just add relative to the initial plan to Jack’s point, it’s a little bit more near term, ’25 and ’26 spend, but that it levels off in ’27 and ’28 versus more of a smooth spend over the 4 years.

Manus Ebbecke — Evercore ISI — Analyst

OK. That’s for me. Thank you.

Operator

The next question comes from Vince Tibone with Green Street. Your line is open.

Vince Tibone — Green Street Advisors — Analyst

Hey. Thanks for taking my question. For the $400 million of planned lender malls that Dan mentioned earlier, what is the current weighted average debt yield on those assets just to help from a perspective? And then also on the $500 million of potential dispositions, how should we think about the quality potentially cap rates on those more selective dispositions? Is it fair to assume that’s gonna be more Eddy properties in addition to some freestanding as you mentioned. But any color there to help FFO modeling would be helpful.

Dan Swanstrom — Senior Executive Vice President, Chief Financial Officer

Vince, on the second part, you’re asking specifically about the $500 million of sales?

Vince Tibone — Green Street Advisors — Analyst

Yes, that’s what I was referencing, yes.

Dan Swanstrom — Senior Executive Vice President, Chief Financial Officer

Yes. So those are more outparcels, freestanding retail, land, parcels, and not enclosed malls. So as we looked at the plan at the beginning, we had said we thought we could accomplish the dispositions of our weighted average 8% cap rate. If you look at the profile of these types of assets, we think those are sub-8% cap rate transactions.

But again, that piece of it is sort of sub 8%, and then it counters off the rest of the sales to kind of get to a weighted average of around 8% as it relates to kind of the overall assumptions on the dispositions. On the first part of your question on debt yields, those are typically what we’re looking at sort of like high single digit debt yields for the three or four assets that we’ve identified.

Vince Tibone — Green Street Advisors — Analyst

No, that’s really helpful, and I appreciate the clarification on the 500. When you said not enclosed malls, I thought open air centers potentially. So I’m at clarified that. And then maybe just changing gears a little bit.

Could you give an update on the potential densification at Los Cerritos now that it is wholly owned. Like is that something you can potentially break ground on in the next year or two? And just curious how you’re thinking about the structure of that project, whether you do it on balance sheet, use a joint venture partner, I just love to get your way of thoughts there.

Jack Hsieh — President and Chief Executive Officer

So Los Cerritos is now an amazing opportunity that we control it. You know that that center continues to perform extremely well. I mean we have options from a very good anchor store tenant wants to take the Sears location, which obviously would — if we did that, it would impede some of our ability to put residential out in that Sears field. I think at this point, what we’re trying to do is maximize the entitlement opportunity for residential density.

And more than likely, we’re gonna sell that land entitled. Obviously, you could sell today with partial entitlements, but we think there’s a lot more value in getting the entitlements. And I’d say that for us to pursue the development ourselves, it would just be, once again, sort of understanding the returns relative to other capital allocation opportunities within our portfolio. But it’s a great site.

It’s a great center. It’s only getting better. And we believe there’s a lot of demand for that parcel, the Sears parcel, and we’re just going for a maximum entitlement opportunity, and then we’ll decide what to do.

Vince Tibone — Green Street Advisors — Analyst

Great. Thank you.

Jack Hsieh — President and Chief Executive Officer

Thank you.

Operator

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

Alexander Goldfarb — Analyst

Good morning out there. And yes, I mean you guys have certainly achieved a lot in a short period of time. So two questions here, Jack. First is just looking at your cash balance, I think it’s about $135 million right now.

There’s certainly a lot that you’re doing, especially around capex leasing. So just wanna understand, is there a minimum cash level that you guys think about as you’re executing your plan? And then how do you balance having cash on the books versus debt pay down?

Dan Swanstrom — Senior Executive Vice President, Chief Financial Officer

Yes, this is Dan. I’ll take that. Where we’re at now from a cash balance is generally where we would be sort of comfortable operating within that range. I think holistically as we look at our sort of sources and uses, we have free cash flow from the business, about $300 million after funds available for vision — sorry, funds available for distribution after our operating capex and TAs if you look at 2024.

Most of that will obviously the run rate on the dividend, and then what’s left funds the development. And to the extent our cash balances dip down a little bit from a timing perspective, we could use our line of credit to temporarily fund some of that. Or we’re also looking at a refinancing right now, which would provide some excess proceeds in the near term. And then as I mentioned earlier, once we get through ’25 and ’26, then the free cash flow of the business starts to produce more, and then we have more optionality at that point in time to pay down debt.

So right now, it’s kind of funding the TAs for the leasing and the development in the near term. And then as we build cash balances out in the out years, we have more optionality to pay down debt.

Alexander Goldfarb — Analyst

OK. And then the second question is there’s a lot that’s going on as you improve the tenancy. So, Jack, you mentioned occupancy is probably gonna come down as you pull out legacy tenants, replace them with better performers. At the same time, there are some dispositions planned.

Is there some sort of framework that you can provide in terms of the FFO or NOI hit that’s gonna occur, say, this year, next year before it obviously rebounds? Just I know you’re not giving guidance. But still, it sounds like a lot of moving parts. And just is there sort of an aggregate number that we can think about impact this year and next that would help us think about this transition phase that you’re going through?

Jack Hsieh — President and Chief Executive Officer

It’s hard to give you a precise answer to that because if we dispose of an asset faster, that makes an effect leasing or current leasing plan impacts this. I mean the best way I can describe it is I think our same-store NOI is gonna be roughly flat, slightly up, maybe slightly down. But generally, in this flat area for the next couple of years, and then it’s gonna start to dramatically start to increase. And as we’re increasing, we’ll be shedding the residual remaining Eddy assets that — or loan givebacks and be monetizing a lot of that $500 million out parcel of land that would be used to pay down debt.

And then you sort of square up on getting into that zone we talked, mid-6s, low-6s, $1.80, plus or minus.

Alexander Goldfarb — Analyst

And then is there — Jack, is there like a percent of same-store NOI as we think about it what percent is that of the total NOI right now? Is that like 80% of total NOI? Like — because obviously, you’ve got some assets that are gonna be moving on.

Jack Hsieh — President and Chief Executive Officer

I’m not sure it’s — I mean I’m not sure that’s the way you wanna look at this to be honest with you. There’s kind of too many moving pieces going through if you’re try to precisely model it. And that’s why candidly, we’re not really focused on it. I can say I’m focused on it, same-store NOI over the next 12 to 24 months because if we we’re gonna accomplish, the uplift is more significant.

And it’s something we’ll try to present when we put out these materials that we talked about this bridge. And I think that will be more helpful to see what we’re shooting for.

Alexander Goldfarb — Analyst

OK. Thank you.

Operator

And the next question will come from Haendel St. Juste with Mizuho. Your line is now open.

Haendel St. Juste — Analyst

Hey there. So I wanted to follow up on some earlier comments talking a lot about the strong leasing demand. I guess I’m curious how that’s showing up in your leasing negotiations. Are you getting more term, better bumps? And I’m also curious what you might be hearing from your tenants in regards to the potential impact of tariffs as you’re having these leasing conversations.

Thanks.

Douglas J. Healey — Senior Executive Vice President, Leasing

So I’ll take the first question first. Leasing demand, and I talked about this a little bit earlier. I mean we’ve got a great tailwind right now. We’ve got a very healthy retailer environment.

And we have a must-have portfolio, even with everything that’s going on in the world. If you think about it, the majority of tenants that we’re leasing to are very sophisticated national retailers that can see past 6 months or see past 12 months. They’re signing leases for 7 to 10 years. I would say as our occupancy continues to increase, that will naturally, by definition, help our revenue structure.

So I would say the lease terms are similar to the way they’ve always been, but I think occupancy — cost of occupancy potential will certainly increase as occupancy increases.

Jack Hsieh — President and Chief Executive Officer

Yes, I was gonna say eon d1 thing, too, is on renewals. I think in the past, renewals tended to be much shorter, 1- or 2-year renewals because there wasn’t a clear direction on what needed to happen in that mall because they didn’t wanna suffer the downtime, so they sort of kick the can. Now on renewals with tenants that we want in the centers, we’re going for longer renewals, which is a different approach. I’d also say like if you look at some of the retailers that are announcing earnings and giving guidance for ’25, I mean it’s not giving guidance, but it’s also not tariff-based guidance.

So look, I’m sure people think about it, talk about it, but it’s not sort of what we’ve seen so far, not embedded in retailers’ 2025 earnings and guidance estimates. And so — and look, a lot of our retailers have already come up with strategies to deal with China and some of the other affected areas. If you’re dealing with lumber coming from Canada or you’re dealing with fruit coming from Mexico, obviously, those type of retailers that rely on that, they’re getting to be much more sensitive to any kind of direct tariff impact.

Haendel St. Juste — Analyst

That’s helpful. I appreciate that. And maybe some commentary, some color, some insight into the tenant watch list here and maybe what level of bad debt reserves you might be using in your budgeting. Thanks.

Douglas J. Healey — Senior Executive Vice President, Leasing

So our watch list right now, and I’ll let Dan comment after I do, but our watch list is significantly lower than it’s ever been. I mean if you compare our watch list to 2019, we have about 60% fewer tenants on it and 45% less square footage, which makes a lot of sense. One, we have a very healthy retailer environment right now. But two, we’ve talked a ton about this.

All the failing retailers, they’re struggling retailers pre-COVID, they didn’t make it out of COVID. So that diminished our watch list exponentially. And, Dan, do you wanna take the financial end of it? .

Dan Swanstrom — Senior Executive Vice President, Chief Financial Officer

Yes. Haendel, it’s about 75 to 100 bps.

Haendel St. Juste — Analyst

Got it. Got it. Thank you, guys.

Operator

That is all the time that we have for questions. I would now like to turn the call back over to Jack Hsieh for closing remarks.

Jack Hsieh — President and Chief Executive Officer

Thank you. We’re pleased to report our progress on the many strategic initiatives within our path forward plan, and we look forward to seeing many of you at the upcoming Citi Conference in Florida. So thank you very much for your time this afternoon.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Samantha Greening — Director, Investor Relations

Jack Hsieh — President and Chief Executive Officer

Douglas J. Healey — Senior Executive Vice President, Leasing

Dan Swanstrom — Senior Executive Vice President, Chief Financial Officer

Floris Van Dijkum — Analyst

Floris Gerbrand Van Dijkum — Analyst

Craig Mailman — Analyst

Brad Miller — Senior Vice President, Portfolio Management

Doug Healey — Senior Executive Vice President, Leasing

Linda Tsai — Analyst

Andrew Reale — Analyst

Manus Ebbecke — Evercore ISI — Analyst

Vince Tibone — Green Street Advisors — Analyst

Alexander Goldfarb — Analyst

Haendel St. Juste — Analyst

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