Macerich Co

NYSE:MAC

Earnings Call Analysis

Macerich Focuses on Streamlining and Debt Reduction

Since our last earnings call, Macerich has made substantial strides in simplifying its operations and improving performance. The company sold an outparcel for $7.1 million, closed a $110 million debt reduction deal, and aims to cut total debt by approximately $2 billion by the end of 2024. Macerich's operating metrics have improved, with a strong leasing pipeline projected to add $71.4 million in rent through 2026. Despite higher interest and bad debt expenses, the firm remains on track with debt reduction and operational goals, expecting significant NOI gains from notable redevelopment projects.

Setting the Stage: Business Context

Macerich is navigating through a transformative period, focusing on three key strategies: simplifying their business model, improving operational performance, and reducing leverage. They aim to cut down their debt by $2 billion, which has led to asset sales and restructuring efforts. This strategic pivot comes amid a challenging retail environment influenced by changing consumer habits post-pandemic.

Q2 Financial Performance: Steady Results

In Q2 2024, Macerich reported Funds From Operations (FFO) of $88 million, or $0.39 per share, slightly down from $89 million or $0.40 per share in Q2 2023. Despite the minor dip, Same Center Net Operating Income (NOI) increased by 1.3%, indicating solid underlying operational stability. Excluding adjustments for bad debt, the NOI growth was even more encouraging at about 2.2%. However, increased interest expenses and a rise in bad debt reserves, largely due to one national tenant, slightly marred these results.

Debt Reduction and Strategic Sales

The firm is actively pursuing asset sales, including a significant transaction with Biltmore Fashion Park that resulted in a reduction of $110 million in debt. With other asset disposals, Macerich anticipates achieving between $1 billion and $1.4 billion in debt reduction by the end of 2024. This is over half of their overall target, reinforcing their commitment to financial prudence and leverage management.

Leasing Momentum: Positive Outlook

Macerich has shown robust leasing activity, with 115 leases for 1.7 million square feet already signed and another 0.5 million square feet under negotiation. The company predicts these leases will generate approximately $71.4 million of incremental rent over the next few years. In 2024 alone, they forecast $28 million to $29 million coming online from these newly signed leases, with projections of $35 million for 2025.

Occupancy Rates: Navigating Challenges

Despite a decline in occupancy to 93.3% from the previous quarter, the rate has improved by 70 basis points year-over-year. Excluding properties in transitional phases, occupancy can be as high as 94.9%. While ten stores from a major tenant's bankruptcy will impact occupancy this year, Macerich's proactive leasing efforts aim to counterbalance these losses.

Market Conditions: Mixed Signals

Macerich's management points to an overall healthy demand environment despite broader retail challenges. Consumer spending has shifted significantly, with a noted decline in discretionary spending. Yet, despite these challenges, traffic across their shopping centers has increased by 5%, signaling steady customer interest—particularly at their prominent locations like Chandler Fashion Center, which saw traffic growth of 20%.

Looking Ahead: Growth and Guidance

Management is optimistic about future growth due to a substantial pipeline of leases and a focus on enhancing existing assets. They are keen on improving occupancy rates and maintaining leasing momentum, with expectations for gradual growth in Same Store NOI as the year progresses. However, no formal revenue guidance was provided for 2024 or 2025, maintaining a focus on operational execution over strict numerical forecasts.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter 2024 Macerich Earnings Conference Call. [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, executive]

Thank you for joining us on our second 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.

With that, I'd like to turn the call over to Jack.

[Jackson Hsieh, executive]

Thank you, Samantha. Since our last earnings call on April 30, I am pleased to announce that we are making solid progress on our path forward of 1, simplifying the business; 2, operational performance improvement. And 3, reducing leverage. Our property ranking criteria is finalized and we are applying operational and capital allocation focus on our properties within the Fortress, Steady Eddy and Eddy's categories.

On asset sales in the second quarter, we sold an outparcel deal for $7.1 million and today we closed on the sale of our 50% interest in Biltmore Fashion Park to our partner RED Development, which will reduce $110 million in debt at Macerich. We are also marketing enclosed centers and preparing for a robust sale process of our single asset outparcels across our portfolio. On loan give backs, we completed the short sale process on Country Club Plaza and are in lender discussions at Santa Monica Place.

Our path forward goal is to reduce $2 billion in debt. Country Club Plaza, Santa Monica Place, Biltmore Fashion Park and the outparcel will reduce debt by approximately $564 million. By year-end 2024, we expect to have line of sight on $1 billion to $1.4 billion of total debt reduction, over 50% of our overall $2 billion objectives.

Operational performance at Macerich continues to rapidly improve. There is an acute focus from our East Coast leasing, asset management and property management teams on the 6 large Eastern seaboard assets, which are an important NOI contributor to our leverage ratio reduction plan. We are also in negotiations on 8 anchor locations in centers within our Fortress and Steady Eddy portfolios, which will enhance overall center performance, traffic and leasing momentum in those centers.

Adding Dick's New House of Sport concept into our portfolio continues to be an important initiative. Our company-wide leasing momentum on executed lease deals, deals in pipeline and releasing spreads are all positive and will result in more overall NOI in 2025, 2026, and 2027. The overall occupancy, sales per square foot, releasing spreads and same store NOI for our portfolio excluding Eddy's properties are noteworthy, namely 94.9%, $911 per square foot, 9.7% and 2.3% respectively.

During the last 5 months, we've made significant progress in identifying meaningful ways to enhance our leasing process across the company, which will improve productivity through significant efficiency, visibility and free up our leasing team to lease, through the elimination of spreadsheets and redundant internal meetings and calls.

We recently had our lease process improvement team present to our Board of Directors and we will roll this out to the entire company on our company-wide town hall meeting later today. Our redevelopment efforts are very focused now on 3 projects at Scottsdale Fashion Square, Flatiron Crossing and Green Acres Mall. In total, these projects will cost approximately $300 million at share of which $44 million in cost has been incurred and will provide an incremental $36 million in NOI to Macerich.

On the human capital front, I am pleased to congratulate Kayode Ola and Alic Kelso, former Co-Heads of Spirit's Asset Management Team, who joined Macerich's Asset Management Team, and Diana Laing has rejoined our Board of Directors.

I will now turn the call over to Doug for a leasing update.

[Doug Healey, executive]

Thanks, Jack. We had another solid quarter both in terms of leasing volumes and metrics. Sales per square foot at the end of the second quarter were $835. This is flat compared to 2023. Sales per square foot, excluding our Eddy properties, were $911. Comp sales in the second quarter as well as sales year-to-date were also flat. Interest rates and inflation are definitely still playing a part in this, and the consumer remains somewhat cautious, especially at the moderate and lower income levels where there's been a noticeable shift from discretionary to non-discretionary spending. Thankfully, most of the markets in which we operate are more fluid in nature and are less affected by this trend.

Through the second quarter, traffic across our portfolio was up 5% relative to the first half of 2023. Only 6 of our centers are showing declining trends. The balance is positive. Most noteworthy is Chandler Fashion Center, where traffic is up 20% this year as a result of the fall 2023 opening of Scheels All Sports, which by the way is on track to be one of the top stores in their fleet.

Occupancy in the second quarter was 93.3%. This is down 10 basis points from the first quarter, but up 70 basis points from a year ago. Portfolio occupancy, excluding our Eddy properties, was 94.9%. Trailing 12-month base rent leasing spreads remain positive at 10.1% as of June 30, 2023, and this now represents nearly 3 years of positive leasing spreads. In the second quarter we opened 276,000 square feet of new stores. This brings our year-to-date total to almost 820,000 square feet, which is 8% more square footage than we opened during the same period in 2023.

At Flatiron Crossing, we opened designer shoe warehouse and 5 below in the former Lord & Taylor box, which is now 100% occupied. At Danbury Fair Mall, we opened the highly anticipated 126,000 square foot Target. Target on level one joins Primark on level 2, and this completes the remix of the former Sears box. Collectively, Target and Primark will produce significantly more traffic and consumer interest and should generate almost 10x the sales that Sears did.

Other notable openings in the second quarter include 7 For All Mankind and ULTA Beauty at fashion outlets of Chicago, Johnny Was and Swarovski at Scottsdale Fashion Square, GAP at Queens Center and Rally House at Deptford Mall. In the emerging brands category, we opened Rowan and Shade store at SanTan Village and Vuori at Fashion Outlets of Chicago and Scottsdale Fashion Square.

Finally, in the international category, we opened garage at Arrowhead Towne Center in Washington Square. MANGO at Tysons Corner, and Sandro at Fashion Outlets of Chicago.

Now let's look at the new and renewal leases we signed in the second quarter. In the second quarter, we signed 233 leases for 750,000 square feet, year-to-date, we've signed leases for 1.8 million square feet. Notable new leases signed in the second quarter include Altered States and Barnes & Noble at Tysons Corner, Build-A-Bear at Arrowhead Towne Center, Carhartt at 29th Street, and Helly Hansen at Fashion Outlets of Chicago.

At Scottsdale Fashion Square, we're very excited to announce the signing of the world renowned Chinese restaurant Din Tai Fung. Din Tai Fung will open in early 2025 and will join Ketch and Elefante in the newly created porte cochere. And as we discussed on our last call, the porte cochere will provide direct access to more luxury in the Nordstrom wing, which includes the recently announced Hermes store.

The emerging brands category was very active in the second quarter with signings of ALO Yoga at Corte Madera and Washington Square, Missouri at Tysons Corner Center, Princess Polly at Scottsdale Fashion Square, Psycho Bunny at Fashion Outlets of Chicago and Queen Center, Rothy's at Broadway Plaza and TravisMathew at Chandler and Washington Square.

Lastly, we signed several leases with international brands including Adidas, Arc'teryx at Fashion Outlets of Chicago, JV Sports at Inland center and Kiko Milano at Queen Center. In the Chandler Fashion Center, we signed a lease with Seafood City, a 66,000 square foot grocery retailer that caters mainly to the Filipino and Asian market. Seafood City will join round one to complete the remerchandising of the former Sears building. And just like Target and Primark at Danbury, this once again speaks to the diversity of large format users eager to occupy space in our high quality Class-A shopping centers.

Looking at our 2024 lease expirations. We now have commitments on 76% of our 2023 expiring square footage of space that is expected to renew and not close, with another 18% in the letter of intent stage. So between commitments and LOIs, we're either done or trading paid for a 94% of our 2024 expiring square footage, almost exactly where we were at this time last year. Further, we currently anticipate our renewal retention rate in 2024 to be very healthy and in the low 90% range.

In the second quarter, 7 tenants in our portfolio filed bankruptcy the largest was Express, who had 26 locations with us totaling 206,000 square feet. Of the 26 locations, 10 will close in the third quarter for a total of 85,000 square feet, resulting in a 40 basis point decrease in our portfolio occupancy. To date, we're negotiating leases or letters of intent on replacement tenants on 50,000 square feet of those closures. And it's worth noting that excluding Express, there's only been 100,000 square feet of space subject to bankruptcy filing this year.

Turning to our leasing pipeline, the end of the second quarter, we had 115 leases for 1.7 million square feet of new stores, which we expect to open during the remainder of 2024, into 2025 and early 2026. In addition to these signed leases, we're currently negotiating leases for new stores totaling just over a half a million square feet, which will open during the remainder of 2024 and into 2025 and early 2026. So in total, that's 22 million square feet of new store openings through the remainder of this year and beyond. And this leasing pipeline of new store openings now accounts for $71.4 million of incremental rent in aggregate, which will be realized in 2024, 2025 and 2026.

And with that, I'll turn the call over to Scott to go through our second quarter results and recent transactional activity.

[Scott Kingsmore, executive]

Thank you, Doug. FFO per share for the second quarter was $88 million, or $0.39 per share, which was consistent with our expectations. This was $1 million, or less than $0.01 per share, lower FFO than during the second quarter of 2023, which was $89 million, or $0.40 per share. Same center NOI increased 1.3% during the quarter, excluding lease termination income.

While these results were fairly consistent relative to last year, the primary driving factors contributing to the quarterly FFO trends are as follows. One, a $4 million increase in interest expense. It's worth noting that half of that increase in interest was from non-cash amortization of the mark-to-market discount on the debt assumed from the acquisitions of Arrowhead and South Plains Mall.

Two, a $2 million increase in bad debt expense, primarily driven by a bad debt accrual for a large national tenant. While we continue to work through negotiations with this particular tenant, considering the circumstances, GAAP dictates that we must accrue a reserve against their outstanding receivables. It is worth noting that this reserve had an approximately 80 basis point dilutive impact on the same center NOI growth during the second quarter, which would have been approximately 2.2% absent this adjustment. Offsetting these negative factors were the following. One, approximately $3 million increase in rental revenue at share. And two, $3 million in FFO from land sale gains, and also from increases in GAAP income from non-cash amortization of acquired above and below market leases.

Onto balance sheet matters. We continue to make solid progress addressing our debt maturities as well as transactions in connection with execution of the path forward plan. On May 14, we closed on the acquisition of our partners 40% share of Arrowhead and South Plains, which we've previously disclosed. Both assets are now 100% owned by Macerich. We paid approximately $37 million for the acquisition of both assets. The cap rate for Arrowhead was 7.2% and we acquired South Plains for the existing debt with no incremental consideration.

As to Arrowhead, with sales approaching $1200 per foot and $500 million annually, and with traffic of nearly 9 million visitors per year, and with a massive microchip manufacturing infrastructure investment totaling over $65 billion scheduled over the next few years, we are extremely enthused to consolidate ownership of the market dominant Arrowhead Town Center.

On May 24, we closed a 2-year extension of the $150 million loan on the Oaks, which now matures in June of 2026. On June 27, our joint venture closed a $275 million refinance of the existing $256 million loan on Chandler Fashion Center with a major life insurance company lender. The new 5-year loan bears interest at 7.06%, is interest only during the entire loan term, and the loan matures in July of 2029. The company realized nearly $18 million of liquidity from the transaction. This deal is especially noteworthy since it was our first major retail financing in 5 years with a LifeCo lender. We are very pleased to see this important source of capital return to our sector, albeit selectively at this time.

On June 28, our joint venture closed on the short sale of Country Club Plaza in Kansas City. Concurrent with the transaction, the remaining amount owed by joint venture under the $296 million loan was forgiven by the lender. The sale for approximately $176 million was effectively completed at a low single-digit debt yield based on current NOI and the outstanding debt balance at closing. This transaction improved our overall leverage by roughly 12 basis points, which happened to offset the increase in leverage that resulted from the acquisition of our JV partners Interest in both Arrowhead and South Plains Mall in May.

We are in the process of closing a refinance of the $115 million loan on The Mall of Victor Valley. The loan matures in September. The new 10-year loan is expected to be $85 million. Fixed interest rate is yet to be locked and determined, but we expect it to be in the mid 6% range and this is the last remaining maturity this year in 2024. We are in the market today sourcing financing proposals for the very productive Queen Center. We believe this transaction will be very well received by the financing marketplace.

Following that transaction, we will have less than $300 million of debt at our company share that matures for the balance of 2025, and that is across 2 loans. The financing market for Class A retail real estate remains wide open and is very, very strong. Year-to-date, in 2024, we have closed 5 transactions totaling nearly $700 million, or $539 million at our share. This follows a very robust 2023 during which our financing activity totaled $2.6 billion or $1.8 billion at our share.

We currently have approximately $612 million of available liquidity. This has now actually been enhanced by roughly $110 million as a result of the closing of the sale of Biltmore, which occurred in the last hour or so. So we have roughly $722 million of available liquidity today, including that transaction. We have made good progress reducing our leverage thus far in 2024, as reflected on the newly added leverage schedule, which is found on Page 28 of our 8-K supplement. We have reduced our leverage to 8.48x as compared to 8.76 at year end 2023. Depending on our transaction success for the balance of the year, we believe we may be able to reduce leverage to the low 8x range by the end of 2024.

With that, I will now turn it over to the operator to open up the call for Q&A.

[Operator]

[Operator Instructions] Our first question comes from Jeffrey Spector with Bank of America Securities.

[Jeffrey Spector, analyst]

My first question maybe a follow-up to where Scott ended. I was going to ask about the long term goals. It seems, Jack, as you said in your opening remarks, you've really started to chip away, I guess, has the timeline changed at all on when you think you'll be able to achieve the goals you had laid out previously? Has that timeline shortened at all?

[Jackson Hsieh, executive]

Jeff, I think we're on track. I mean, the reduction in debt is happening probably faster than the plan. I would say the leasing and the NOI piece, that's on track. I wouldn't say that's slowing or faster. And asset sales are going along as planned. So, like I said, we'll be able to describe a range of $1 billion to a $1.4 billion in debt reduction by year end. So we feel like we're making way ahead of schedule on that front.

[Jeffrey Spector, analyst]

And then my follow up is on Biltmore Fashion Park. I guess, can you talk a little bit more about the rationalization to sell your Joint venture interest in that asset? Again, I believe that's considered a top asset.

[Jackson Hsieh, executive]

It's a very good asset. It's in our Steady Eddy category. That project had entitlements to increase office density on the project, as we added a new lifetime fitness into that location. So over time, that was going to have a more balanced retail mixed use component to that overall project. In our judgment, we felt like that was a good way to raise liquidity. It's good for our partner. I think they're extremely happy about it and still maintain our leasing position in the marketplace within the greater Phoenix market, especially when you consider we were able to gain complete control over Arrowhead. So sort of part and parcel with just moving ownership across properties.

[Operator]

And our next question comes from Craig Mailman with Citi.

[Seth Bergey, analyst]

This is Seth Bergey on for Craig. I guess how many other, like, with the 6.5% cap rate on the pending asset sale do you guys have other assets in your portfolio that you think could transact around that cap rate?

[Jackson Hsieh, executive]

Look, I'd rather not get into cap rate assumptions. We gave kind of a wide range. We'll continue to give you updates as we complete these sales. And I'll just leave it at that.

[Seth Bergey, analyst]

Okay, great. And then for the follow-up, is there any color you can give around the negotiations with the lenders on Santa Monica or any timing updates you can give there, or just any other potential give backs in the works?

[Scott Kingsmore, executive]

Yes, I'll comment on that. We do plan to be involved in that asset, at least from a management standpoint, through probably the better part of the second half of next year into 2025. We have uses that we continue to perform work on to bring those tenants to the campus. Uses like Arte Museum, Din Tai Fung, Club Studio, which is high end fitness. It's certainly undetermined as to when the time frame would be that we'd be off title. That will certainly take some time, but that's probably all I'm at liberty to comment on. But we do expect to continue to be involved for at least another 12 months in terms of managing the asset.

[Operator]

And our next question comes from Samir Khanal with Evercore.

[Samir Khanal, analyst]

Hey, Jackson, I guess maybe take a step back and maybe you can comment on the transaction market today. Guess I'm trying to figure out how deep is that buyer pool brasses that you have in the market and whether it's enclosed malls and open air centers?

[Jackson Hsieh, executive]

Look, I mean, I don't have to tell you the market is not that easy to be selling any kind of big commercial properties these days, whether it's malls or office buildings. They're just more challenged. I would say that we have a particular strategy in mind as it relates to trying to monetize the different assets that we have on our schedule. I think if you were just to ask a professional that works at the sale of regional mall, it's not that easy to do right now. But I would tell you that I believe that we'll be able to execute and I'll just leave it at that. We'll continue to give reports on assets as we close them. And obviously, we're in the market with some other ones right now.

[Scott Kingsmore, executive]

And Samir, just one thing to add, and we've spoken to this in the past, too, we do anticipate focusing also on outparcels, which we think do have a different type of marketplace. These are freestanding buildings with high credit tenants, and we think there's a wider buyer pool and we think those could execute fairly well. So that's an aspect of our plan. Like Jack said, we'll continue to report progress on it, but that's another aspect of our plan that we've spoken to you guys about in the past, and I think that's a much broader market than what Jack was just referring to.

[Samir Khanal, analyst]

Okay, got it. And I guess, Doug, just shifting over to you, you spoke about, I think you said 500,000. You said kind of 0.5 million of space that you're negotiating, I think, for '25 and '26, maybe provide a bit more color on kind of how those conversations are going with tenants. What's been the pushback, if any, as they're approaching sort of this potential slowdown, maybe in the economic side, maybe next year.

[Doug Healey, executive]

Hey, Samir, I'll comment on the second part of the question first, regardless of sales, and we talked about our sales being flat, the retailer environment is still very, very robust. I mean, we are very close to where we were in terms of signing leases year-to-date this year versus year-to-date last year. That's sort of like looking in the rearview mirror, if you will.

What I like to refer to, and this sort of funnels into the pipeline is, and I think we've talked about this before, but every 2 weeks, we have an executive leasing committee where we review deals that will go to lease, that will get signed, that will go into our pipeline. And to me, that's really an indication of where we are today, where the market is today, and where the market is on a go-forward basis. And I can tell you that year-to-date, end of second quarter, we're 30% ahead of where we were in terms of reviewing deals in this committee.

And keep in mind, last year was a record leasing year. So we're very pleased with where we are. And with regard to the pipeline. You refer to the 0.5 million square feet that we're negotiating. And I believe what we said is we have 115 signed leases for 1.7 million square feet. Those are signed, they're in the bank. In addition, we're negotiating leases with over 0.5 million square feet. So that's over 2.2 million square feet of new store openings through this year and the next 2 years.

[Operator]

And the next question comes from Floris van Dijkum with Compass Point.

[Floris Gerbrand van Dijkum, analyst]

Hey, guys, a question. I know you're not giving guidance, but, Scott, I think you mentioned same store NOI obviously came in at 1.4%. It would have been 2.2%, except for the reserve for bad debt. But you've got a big pipeline that's opening in the second half of this year. Is this the right way to think about the underlying NOI growth, it's going to accelerate in the second half of this year and into '24?

[Scott Kingsmore, executive]

Yes, I think that's I think that's accurate. Floris. The pipeline is very significant. We'll have a lot of openings, which means that signed but not open pipeline. I think over the course of the next several quarters, we'll probably start to tick down just as a function of the openings, including some of the larger format space. But I think your commentary about the pace of NOI growth is accurate.

[Floris Gerbrand van Dijkum, analyst]

And then maybe the other question I have here is, I'm curious as to, I mean, it's a little early days, but the $600 million of Queen Center debts, I mean, obviously, I think that was around 3.5%, if I recall. what are you hearing or what do you expect in terms of what's the competition like for from lenders to, and is that going to be a CMBS transaction? Is that going to be a LifeCo? And how tight do you think spreads could get?

[Scott Kingsmore, executive]

A lot of sub questions there. I'll try and hit them all. Yes, I do believe that will be a CMBS execution. It's going to be a significant financing. I think we'll reduce the leverage there. We could reduce it somewhere in the [ 5 and 5.25 ] range. I think that's probably a more appropriate leverage profile for Queens. It will be a very hotly contested asset. It'll be very well received by the market.

Our major relationship lenders, in fact, have been looking forward to getting the opportunity to review that asset and bid on it, and they're actively doing it today. So, it's too early to comment on spreads. Obviously, we're moving into a better rate environment here in the second half. In fact, we'll probably know a little bit more, I guess maybe in the next hour after Chairman Powell speaks, but we'll probably hit the rate market at a much better time than if we had executed earlier this year, that's for sure. But I think Queens will be a great transaction. I'm looking forward.

[Operator]

And the next question comes from Vince Tibone with Green Street.

[Vince Tibone, analyst]

Can you discuss your thought process of seeking refinancing on Victor Valley versus handing that one back to the lenders? Just curious how you thought about the $30 million additional equity there versus the deleveraging goals and striking the right balance there?

[Scott Kingsmore, executive]

Yes, Victor Valley is a solid asset. In fact, I believe virtually every space there is occupied. It's about 99% occupied today, has a lot of momentum going for it. It's an asset that we still believe is relevant. It's kind of the only game in town in the high desert community of Victor Valley. It's certainly not one of our top 10 assets, but it's a great asset. We firmly convicted with it. And reducing leverage here and there is overall part of our goal. So I don't think that one was a difficult decision for us to make.

[Vince Tibone, analyst]

No, that's helpful. Is there any kind of redevelopment potential there, your near or intermediate term or is it pretty stable asset in its current form?

[Scott Kingsmore, executive]

I would say the one opportunity we have is, we do have a dark Sears location on the backside of the center, and we're sourcing concepts right now. So that's probably the biggest opportunity to reposition it.

[Vince Tibone, analyst]

Got it. But it sounds like that's probably more retail than any kind of larger densification. Is that fair?

[Jackson Hsieh, executive]

Yes, that's correct. It'll be retail or retail like use, could be entertainment oriented.

[Vince Tibone, analyst]

No, that's really helpful. If I could squeeze in one more. How should we think about the commencement timing of the $71 million of new leases that are signed but not yet open? Just share any numbers or guideposts to help us think about how much make these commencing the rest of this year versus '25 versus after that. That would be really helpful for thinking about near term growth.

[Scott Kingsmore, executive]

We've got in 2024, roughly $28 million to $29 million revenue coming online from the pipeline. 2025, which is, frankly, still building as we continue to finalize leases and put them into that '25 bucket. It's tracking at about $35 million. And then '26 is the balance. One thing that's worth noting, pipeline stands at $71 million today. I think that's measuring that for about 8 quarters or so now. And every time we do, the pipeline continues to grow. So that really does speak to the strong demand environment we're dealing with.

[Operator]

And the next question comes from Linda Tsai with Jefferies.

[Linda Yu Tsai, analyst]

How do you think about where occupancy falls out year end and then maybe towards the end of next year?

[Scott Kingsmore, executive]

Linda, I'll go ahead and take that. I think we've got, as Doug mentioned, Express, all their stores were open at the end of the second quarter. We will see about a 40 basis point occupancy hit in the third quarter as the 10 stores where their leases were rejected ultimately closed. In fact, most of those, I think, are closed right now. But I do think we'll see continued growth to offset that. My expectation is we'll land somewhere between 93.5% to 94% by the time we get to the end of next year.

As I look forward into 2025 again, Express aside, it's been a pretty good year in terms of closures. We've got strong renewal, retention. There is one major retailer that we're working with right now. I don't think we're going to take an excessive amount of space back from them, but that's probably the only potential negative that I see in the immediate future that could impact us in 2025. But I think on balance, we should continue to see occupancy grow.

It's also noteworthy, and Jack highlighted this, and I think maybe Doug did, too, that once you start parsing through our portfolio based on our new groupings and rankings, when you exclude our Eddy assets, we're really dealing with full occupancy and almost 95%. And so really, the focus there will be improving the quality of occupancy and moving temporary to permanent. Within that group, excluding the Eddy's, we've got less than 7% of our space temporarily occupied. So a big portion of our focus will be trying to push that down into the high 5s or so.

[Linda Yu Tsai, analyst]

And then I think you said you only had 100,000 square feet bankruptcies this year. Can you remind us what that numbers look like annually since coming out of the pandemic?

[Scott Kingsmore, executive]

Yes, sure. Doug, you've got the stats right there.

[Doug Healey, executive]

So 100,000 square feet excluding Express. If I looked at the last couple years, 2023 and 2022, just over 100,000 feet. In fact, it was about 111,000 feet in each of those years, '23 and '22. About 370,000 feet in '21. And of course, 2020 was a watershed year in which we had 6 million square feet file, including about 2-thirds of that were JC Penny.

[Operator]

And the next question comes from Alexander Goldfarb with Piper Sandler.

[Alexander Goldfarb, analyst]

2 questions. First, just going to the credit quality, obviously, really good to hear that there's so few bankruptcies, but just the comments initially about some changes in discretionary versus non-discretionary. Obviously we've seen some headlines from stores and maybe it's more on the QSR front. But how do we interpret some of these headlines of consumers pulling back with the fact that when you look at the results, it's been really strong. Like you guys said, just one tenant you're in negotiations with. So how do we explain the disconnect between some of these headlines we see about retailers expressing some issues with consumers versus the reality of what's actually happening at the store level.

[Doug Healey, executive]

Hey, Alex, it's Doug. I'll take that one. Yes, no doubt we all see deadlines, and I think I said in my opening remarks in our portfolio, basically we're flat. However, what we're hearing in the industry and with some of the industry experts reporting is anywhere from 3% to maybe 4% down. So you could argue that for the time being, flat is the new up. And as I said earlier, sales really aren't affecting the retailer demand. And I think there's a couple of reasons for it.

Number one, I believe it's a testament to our portfolio. Our portfolio. If you think about the markets that we're in, whether it's LA or Marin or Walnut Creek or Scottsdale or New York City or Washington DC, we must have properties. And, yes, I mean, there's some noise out there right now in terms of sales and in terms of macroeconomic environment. But, retailers are much longer looking in nature and they're signing leases for 7 years to 10 years. So they're just seizing the opportunities that are out there. And I think it's a real testament to our portfolio.

[Alexander Goldfarb, analyst]

Okay. And second question is, Jack, you've now been at the helm for 4, 5 months now. You've had a good chance to see the portfolio, talk to the people, go through the processes. Are there any areas in particular that you view are sort of trouble areas or areas where there needs to be more work done to execute your plan? Or at this point, you feel like the next 3 years to 4 years to execute the plan. Everything is there, it's just a matter of time to execute. I'm just trying to understand what elements are time based versus what really requires you to get sort of under the hood and really do some heavy "mechanical changes", if you will?

[Jackson Hsieh, executive]

We don't have any big mechanical changes to start with that. I think it's just, we're just realigning our efforts around this strategy. We have a real clear prioritization of assets and things that we're focused on, and there's really more realignment of resources. That's what's going to happen, over the next 2 to 3 years. And we're already seeing the results of it already, as I said.

[Alexander Goldfarb, analyst]

Okay. Yes, no, I mean, you've achieved a number, especially as Scott mentioned, with the financing transactions and the change in that marketplace versus what it was coming out of COVID.

[Operator]

The next question comes from Michael Mueller with JPMorgan.

[Michael Mueller, analyst]

This may just be a quick one. I'm looking at the press release wording, and it says that you're in negotiations with the lender about the terms of Santa Monica Place. About that loan. Is there a chance that you could keep it, or am I just reading into the wording?

[Jackson Hsieh, executive]

Yes, I think. I think I've probably said all we can say at this point, Mike. The asset has its challenges and the capital structure is upside down. So, yes, I think, I probably said as much as I can say at this point.

[Operator]

The next question comes from Ravi Vaidya with Mizuho.

[Ravi Vaidya, analyst]

Hope you guys are doing well. Can you offer more color, what happened with Chandler Freehold and the fair value adjustment that allowed you to record a $16 million credit to your interest expense? And will this new arrangement allow any further adjustments to interest expense beyond the quarter?

[Scott Kingsmore, executive]

Well, the good news for everybody who tracks our P&L is that adjustment will no longer be relevant going forward. So that's really nice. We did have a restructuring of our joint venture with our partner, which resulted in a change of accounting. In short, effectively dating back to 2009 when we did our initial JV with that partner, we had to defer our gain recognition from that transaction. As a result of the restructuring, we were able to accelerate that gain this year and finally recognize it, which was a large P&L item exceeding $300 million. And you've probably seen that in our EPS disclosures.

This was the last quarter in which we had to mark the asset and the debt to market. And as that flows through interest expense. It's something that we do add back, whether positive or negative, for FFO purposes. But like I said, Ravi, the good news is you can kind of disregard that going forward. It's a bit of noise that we will gladly see in the rearview mirror.

[Ravi Vaidya, analyst]

Got it. That's helpful. Just one more here. Can you offer some more color on Country Club Plaza, specifically with regards to loan forgiveness that occurred there? And what were the negotiations like, and is that something that could occur with other assets within the portfolio that will help you reduce debt?

[Jackson Hsieh, executive]

Yes, somewhat limited just by confidentiality in terms of what we can say there. Each one of these things is, I guess I'll say, relatively bespoke in terms of how it ultimately settles. This was effectively a 3 party transaction, which a third-party buyer and the lender and in our joint venture collectively arrived at a resolution. It was non-recourse debt. So at the end of the day, to the extent the debt was not recovered by the sales price, it was forgiven. Like I said, these are all unique transactions and they all flip in different directions. That's about all I can say, though, on this one.

[Operator]

Our next question comes from Greg McGinniss with Scotiabank.

[Greg McGinniss, analyst]

Just click on Santa Monica. Are you still spending on the redevelopment to bring in some of those new tenants?

[Jackson Hsieh, executive]

Greg, can you repeat that one more time?

[Greg McGinniss, analyst]

For Santa Monica, it came out of the redevelopment pipeline, but it sounds like you're still bringing in new tenants there. So you're still spending that capital to bring them in?

[Scott Kingsmore, executive]

Yes, there are reserves that are set aside to manage that. So we're effectively, basically just funding all the construction work to bring those tenants to the campus out of those reserves. We continue to asset manage and property manage the property, though. So to the extent there's opportunities, we will advance those with the lender from a leasing standpoint.

[Greg McGinniss, analyst]

Then on tenant sales, or I guess on percentage sales, we see tenant sales are only down 2% year-over-year, but percentage rents down for the consolidated portfolio about 45% year-to-date. Is that a function of converting some tenants to a higher base rent or what's driving that number and what's the expectation for the rest of the year?

[Scott Kingsmore, executive]

Yes, there's a little bit of that, a little bit of conversion, but most of that was in the rear view. Most of that we did in 2022 and namely in 2023. Some of it is just over the course of time as the rent increases, the breakpoint increases, and with sales plateauing, percentage rents are down. That's the other primary factor. We'll see percentage rents kind of settle in. I think by the time we get to the end of this year, we'll see percentage rents, probably no longer declining and they'll remain relatively stable. Bear in mind, we're coming off a period of time where percentage rents were about 5% to 6% or so of our aggregate revenues. And in the fullness of time, they're typically about 2% to 3%.

[Greg McGinniss, analyst]

Okay. And if I could just ask one clarification on the strategic plan which called for the disposition or hand back of 12 assets, does that mean full assets or do things like the department store and out parcels factor into that number?

[Jackson Hsieh, executive]

Yes, those are really full assets. When we refer to that grouping, the outparcel sale that we did is one of what we think could be several. I would say that's smaller in nature than some of the other opportunities we're looking at, which will be more significant. But those would be in addition to the full asset dispositions.

[Operator]

[Operator Instructions] Our next question comes from Ronald Kamdem with Morgan Stanley.

[Ronald Kamdem, analyst]

Hey, just 2 quick ones, starting with the eastern 6, which is a sort of a key NOI driver. I know you talked about sort of in place plans and so forth. Maybe can you discuss a little bit more what the strategy is going to be behind there, is there just a new team? New sort of product mix? Just any sort of additional color on that piece of it.

[Jackson Hsieh, executive]

Let's say the team is the same, just more energy and effort and focus. Each of those 6 assets have a different path to get to that NOI bridge. We talked about Green Acres a lot. I think we talked about Kings Plaza on the front, that Best Buy, the Best Buy Box. And it just continued improvement at Queens. And we're seeing a lot of progress over at Danbury. And freehold has a number of anchor stores, anchor locations under redevelopment right now. With Dick's House of Sports coming in, one of them. And of course, Tysons.

[Ronald Kamdem, analyst]

Yes. Makes sense. My second question was just on the, as you're thinking about sort of the long term strategic plan, obviously you've made a lot of progress in the first year. Just #1, when do you think you'd be in a position to come back with guidance? Is it next year? And then #2, as you sort of give back assets and the number of asset strengths, at what size do you think you become maybe less of a scale or relevant to a national and international retailer? Like, is there a risk that you actually could become too small? Just the entire portfolio? Is that something you thought about?

[Jackson Hsieh, executive]

Yes, I'll start with that question first. I don't think this plan will result in us being non-relevant. I think we have a lot of relevant assets and particularly relative market position. Like you look at just Phoenix, for instance, and other parts of the country. But I'd say that for us, the plan is going well. We have tremendous flexibility. It's all, I say, tremendous flexibility on different routes for success, right. Different assets, different ways that we want to move forward, different ways of handling give backs. That's why I kind of said we'll have line of sight. We'll be able to describe it at year end for $1 billion to $1.4 billion of debt reduction. I honestly don't want to put guidance out this year, and I'm probably not going to do it next year. Put it out there.

What you all want us to be doing is getting after that $2 billion in debt, leasing like crazy like these guys are doing, and the properties will kind of speak for themselves. Resolution on those anchors that we talked about, that's not only filling empty locations, that's giving us the ability to really lease up those wings so those centers that really have been kind of fighting with one arm kind behind their back. So, yes, that's what's really important, giving you guidance next year, up or down, I don't think it's going to really help honestly, in terms of achieving what we want to achieve, which is get to the low 6 times, get to that $1.80 range, and we're going to do it. So that's, that.

[Operator]

I show no further questions at this time. I would now like to hand the call back over to Jack for closing remarks.

[Jackson Hsieh, executive]

Okay, well, thank you. We appreciate the opportunity to meet with many of you over the last couple of months following disclosure of our path forward plan, and we look forward to reporting our continued progress on executing this plan over the next coming quarters. Thank you again for your time today. Bye bye.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.