The last year has been tough on retailers. It’s been harsh on landlords, too. And that’s shown up on the balance sheets of some of the country’s biggest retail landlords – mall operators.
As the nation’s third-biggest mall owner and operator, Macerich Co. has not been immune.
The Santa Monica company lost $14.4 million in the fourth quarter on revenue that shrank 17 percent from a year earlier to $200 million, reflecting falling rents and the loss of tenants.
“People are trying to save or are trying to figure out how much they are going to pay in taxes and health care. You have businesses on hold and you have consumers equally nervous,” said Alexander Goldfarb, an analyst for New York-based Sandler O’Neill + Partners LP who covers the real estate investment trust.
But Macerich, which owns more than 70 regional malls, has been sticking to a corporate game plan that is helping it ride out what Chief Executive Arthur Coppola recently called “the most difficult year in any of our recollection.”
In 2009, the company was able to pay off $1.36 billion in debt using a variety of financial maneuvers, including a stock offering, selling property and joint-ventures.
The company also pursued its long-standing strategy of remaking older mall properties, allowing it to raise rents. Local examples include the soon-to-open Santa Monica Place, in the final stages of a $265 million remodel, and Los Cerritos Center. It also recently reopened large properties in San Rafael and Scottsdale, Ariz.
“We are now set over the balance of this year and into next year to reap the benefits of the expansions and the redevelopments,” said Coppola during the company’s Feb. 11 fourth quarter earnings call. “The environment is definitely feeling much better on all fronts, whether it be the capital markets, the debt markets, (or) the retailers’ sentiment.”
Investors like the outlook. Since the stock hit an all-time low of $5.45 in March 2009, Macerich’s share price has gone on a nearly yearlong rally. It closed at $33.67 on Feb. 23, a gain of more than 500 percent over last year’s low.
Four out of 15 analysts have upgraded the stock in recent months. According to Bloomberg News, three analysts now rate Macerich a “buy” and 12 rate it a “hold.”
Property positioning
The company has been hit hard by bankruptcies and tenant closures. Midrange department store Mervyns shuttered the last of its stores Dec. 31, 2008 – about a dozen of which were housed in Macerich malls. But the company has already filled some of those spaces, including a vacancy at Los Cerritos Center, with Forever 21 stores. Macerich saw its portfoliowide occupancy drop to 91.1 percent at the end of 2009, compared with 92.3 percent a year earlier.
The switch from staid Mervyns to the trendy Forever 21 chain highlights one of Macerich’s strengths: an ability to fill its properties with strong tenants.
“All the companies get affected by tenant closures and bankruptcies, but it hasn’t impaired their business. And it just shows you the strength of their portfolio and quality of their centers,” Goldfarb said.
Santa Monica Place, which Macerich bought in 1999, highlights Macerich’s penchant for “repositioning.” The mall is set to reopen Aug. 6 after a massive overhaul that has kept most of the 550,000-square-foot property at the end of the Third Street Promenade shuttered for more than two years. New tenants include Burberry, Tory Burch, Michael Kors and Kitson L.A. Macerich has leased 85 percent of the mall, which will be anchored by Bloomingdale’s and Nordstrom. The goal of the project is to open the mall up to the crowds on Third Street.
“Macerich has always had a keen eye for projects that were looking to be repositioned both physically and from a merchandise standpoint,” said Macerich’s Randy Brant, executive vice president of real estate.
Debt dealing
Much of the company’s focus in the last year has been retiring debt, which built up over the last decade as it acquired and redeveloped properties, many in the West and Southwest.
In 2001, the company owed some $1.5 billion, but at the end of last year the figure hit $6.6 billion. More critically, a good chunk was coming due this year.
The joint ventures the company formed raised enough to pay off $446 million in 2010 term notes. One notable deal was with Heitman LLC, which paid Macerich more than $167 million and assumed $161 million in mortgages on two malls. The company also sold 25 properties that it termed “noncore assets” for a total of $151 million.
The company is a “survivor in the capital crunch,” wrote Michael Mueller of New York’s JPMorgan Chase & Co. in a November research note. He rates the company “overweight,” equivalent to a buy. But Goldfarb, who recently upgraded Macerich from a “sell” to a “hold,” takes issue with some of the company’s debt reduction measures.
“We would love to have seen the company not joint-venture the malls, but instead raise a meaningful amount of equity to both delever as well as unencumber assets,” he said.
In fact, the company did raise equity. It sold 13.8 million shares in a common stock offering in October that raised $383 million. (In May, it reduced the amount of cash it pays in its dividend; 90 percent of the dividend is now paid in company stock.) Goldfarb said Macerich should have raised more money to pay down more debt. However, management is pleased with the results.
“We still have plenty of work to do on the debt reduction and delevering side but it is all very manageable,” Coppola said.
