By JOYZELLE DAVIS
Macerich Co., the regional mall real estate investment trust, has been on a shopping spree.
In the past 17 months, the Santa Monica-based company purchased about $1 billion in properties, bolstering its portfolio by almost 150 percent. This month it will close its biggest single deal to date, a $975 million joint venture with Simon DeBartolo Group Inc. to buy 12 regional malls.
In its third quarter ended Sept. 30, net income was $1.9 million, compared with $4.7 million for the like period a year earlier. The earnings drop was attributed to the company writing off a property that it sold in the fourth quarter of 1997.
Revenues were $159.7 million vs. $111.1 million a year ago.
Macerich operates in a tough market. Hotel and office REITs have been hot stocks in the past year because the shortage of supply has allowed landlords to hike their rental rates. But the regional mall market has been saturated since the mid-'80s, making it difficult for owners to raise their rents, according to Greg Andrews, an analyst at Green Street Advisors Inc.
Locally, Macerich owns the Lakewood Center, Villa Marina Marketplace, the Stonewood Mall in Downey and it has a stake in the Manhattan Village mall.
Regional malls are facing competition from mail-order and online catalogues as well as from neighborhood discount centers.
On top of that, the retail sector is still recovering from years of department store closures and consolidations as well as lackluster holiday sales.
Analysts, however, are enthusiastic about Macerich. Its malls had an occupancy rate of almost 92 percent at the end of 1996. Retail sales at stores in its shopping centers were up 4 percent for the first nine months of 1997, the latest data available.
Analysts say the company succeeds by buying in markets with little competition and revitalizing tired centers.
"They are recognized within the industry for their expertise at renovating and repositioning malls," said Judy Hedin, an analyst at Jefferies & Co., whose firm rates Macerich a buy. "Their proven skill made it possible for them to strike that deal with Simon DeBartolo."
For all its success, however, Macerich's stock price has risen just 4 percent over the past 12 months. That beats the regional shopping mall REIT average of 1.4 percent, but doesn't approach the 28 percent increase run up by the S & P; 500 over the 12 months.
Andrews pointed out that most investors buy REIT stocks for the dividend payouts something that's becoming harder to find among other securities.
Macerich last week announced a 1997 dividend yield of 6.5 percent, which is average for most REITs. And, for calendar 1997, the stock increased about 9 percent. Taken together, most investors will be happy with those numbers, Andrews said.
"That's perhaps not an exciting performance" compared to some blistering stocks, Andrews said. "But on a long-term basis, that is all that any investor should expect."
Thomas O'Hern, Macerich's senior vice president and chief financial officer, points out that the company has averaged "an annual return of 19.5 percent since we went public in 1994. In 1996, we had a 40 percent return."
"The fullness of time shows that our stock is a good growth and income stock," he said.
Macerich buys regional malls that have a big portion of urban shoppers almost to themselves, either because they already contain all the big-name stores customers want or there's no room left to build a competing mall, according to Al Otero at European Investors Inc., a New York-based investment advisement group.
The company will own more than 33 million square feet once the DeBartolo joint-venture deal closes, and it plans to add more this year, O'Hern said.
"We plan to continue our strategy of looking for assets with intrinsic value taking good real estate that can be turned into great properties," he said.
Macerich sticks to the basics when renovating its properties. While some mall owners are adding entertainment components, such as virtual reality games, to revitalize their malls, the wildest Macerich gets is adding a multiplex theater.
"They're not spending a lot of money trying to turn their malls into entertainment centers, and that's probably a good thing," Hedin said. "They see regional malls for what they are and try to make them better."
Conservative as Macerich's approach may be, the market might force it to become aggressive. As commercial real estate prices keep rising across the nation, prices for regional malls are going up as well. But analysts say that Macerich has so far been able to pay fair prices for its property, and financed its deals through a combination of cash, taking over debt or offering shares.
Macerich funded its joint venture with DeBartolo through the sale of $100 million in convertible preferred stock. Secured Capital Group Inc. purchased all the shares but will not have an active role in the company, O'Hern said.
For reprint and licensing requests for this article, CLICK HERE.