Southwest Focus Is Working to The Benefit of REIT Macerich

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Southwest Focus Is Working to The Benefit of REIT Macerich

By DANNY KING

Staff Reporter

Investors are generally encouraged by real estate investment trust Macerich Co. slashing its debt load in the fourth quarter, although there remains concern about the all-important California market.

Trading last week near its 52-week high of $33.30, reached in late March, Macerich stock has gained 9.5 percent since the beginning of the year and 14.5 percent over the past 52 weeks.

Its performance has outpaced locally based Arden Realty Inc. and Kilroy Realty Corp., respectively down about 7 percent and flat since the beginning of the year, and kept up with the regional retail REIT sector.

Rising rents and low vacancies have helped Macerich, Simon Property Group Inc., General Growth Properties Inc. and Rouse Co. appreciate steadily over the past year.

During the fourth quarter, Macerich, whose portfolio vacancy stood at 6.1 percent, re-upped leases at rates 17 percent higher than those expiring.

Still, Salomon Smith Barney maintained a $32 price target and an “in-line” (hold) rating for the stock in a report issued in February, noting that the stock is trading at a higher “funds from operations multiple” than other shopping mall REITs.

Fourth quarter 2002 funds from operations net income exclusive of debt restructuring, property sales, depreciation and amortization were up 13 percent from the year-earlier quarter. The jump is primarily due to the $1.5 billion purchase of Phoenix-based Westcor Realty Limited Partnership in July, but it was also helped by a slight increase in same-center sales.

“While Macerich continues to be a story we like, we are held back by the premium valuation,” the report said. The company is trading at about nine times its FFO figure, a 7 percent premium to other mall REITS, according to Salomon Smith Barney.

Additionally, the company’s extensive California portfolio could be an issue, according to a March report from WR Hambrecht + Co. With the state budget deficit in the $28 billion to $35 billion range, proposed increases in sales and property taxes could have an impact.

Nearly a third of Macerich’s property is in the state, placing it 14th among nationwide REITs in California exposure.

Despite this, Macerich’s concentration on the West Coast and Southwest works to its advantage, according to Louis Taylor, senior real estate analyst with Deutsche Bank Securities Inc., which raised Macerich’s target price to $36 from $33 on April 4.

“We’re glad they’re there and not in Northern California or Atlanta,” said Taylor. “No place is doing great, but Phoenix grows by 1,500 people a week.”

Among the reasons for optimism was last July’s purchase of Westcor, which adds 15.9 million square feet to its now 57 million-square-foot portfolio. Macerich moved quickly to cut the debt incurred in that deal by raising $420 million in a 10.2 million-share equity offering in November.

It also sold a $15 million Ventura property on Christmas Eve, bringing its debt-to-equity ratio to 1.9 on Dec. 31, from more than 3.3 on Sept. 30.

As for new product, Taylor was optimistic about the imminent opening of the 624,000-square-foot Queens Center in New York, “which is worth a couple bucks right there.”

“The company’s throwing off a fair amount of cash flow each quarter,” he said.

With two other retail projects totaling 880,000 square feet scheduled to open in Arizona by the end of the year, the company should achieve a 5 percent annual FFO growth for both 2003 and 2004, according to Taylor.

The local holdings include Westside Pavilion and Santa Monica Place, the later of which it bought in 1999 for about $130 million.

Two years ago, Macerich proposed a plan that would involve taking the roof off the 650,000-square-foot center, adding both an office and residential component and moving the parking underground. The move would involve a $150 million subsidy from the city, according to Rob York, a real estate consultant to the city’s Bayside District Corp.

The plan has been scaled down, however, as the mall is suffering from decreasing sales. While Macerich has released no figures, sales tax figures from Santa Monica Place are estimated to be down about 5 percent in 2002 from 2001, according to Gwen Pentecost, senior administrative analyst for Santa Monica’s economic development department.

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