Shoppers at Los Cerritos Center are sometimes hammered silly these days by the sounds of heavy pounding.

A new Nordstrom store is in its final stages of construction at one end of the county’s seventh largest mall. And connecting the upscale department store to the center is a corridor not quite as far along that will feature hip stores such as MAC Cosmetics and True Religion Brand Jeans.

All told, the project is costing about $95 million – no small sum in a day when retailers are finding it difficult to make worried customers part with their cash.

Even more noteworthy: Mall owner Macerich Co. of Santa Monica started construction well after the economy took its nose dive – all while trying to deal with its own debt hangover after an aggressive nationwide expansion.

“Retail openings are few and far between in 2009,” acknowledged mall manager Ken Kraus. “However, we feel that this is the right thing to do.”

In the second quarter, the real estate investment trust reported owing $5.96 billion in short- and long-term debt, compared with $1.52 billion in 2001 before its expansion spree started in the Southwest.

That kind of debt was viewed as manageable before the economy fell apart, retails sales waned and store chains such as Shoe Pavilion, Linens ’n Things and Mervyn’s closed. Average mall vacancy rates are now up to 10.3 percent nationwide, the highest since 1992.

Macerich has responded not by cutting back but by shaking hands on a series of joint ventures that involve selling major shares of some of its properties. It’s been using the money to pare down its debt.

Most recently, for example, private equity firm GI Partners – based in Menlo Park and London – paid $116 million in cash for a 75 percent interest in FlatIron Crossing, a 1.4 million-square-foot regional mall in the Denver suburb of Broomfield.

“Last year the world turned upside down,” said Alexander Goldfarb, an analyst with New York-based Sandler O’Neill & Partners LP, which follows Macerich and the retail industry. “Now the company is trying to reinvent itself by undoing the situation it’s in.”

Expanding Cerritos

In the case of the Cerritos mall, Macerich did not sell a chunk of equity. However, it got the money to expand the mall by splitting the costs with Seattle-based Nordstrom Inc., though neither company would disclose financial details of the partnership.

It is the first renovation and expansion of the 1.29 million-square-foot Cerritos mall since Nordstrom opened its store there in 1981, a decade after the retail center was built.

The improvements involve the construction of a 139,000-square-foot Nordstrom building at the mall’s north end, connected to the existing mall by a 36,500-square-foot corridor containing space for nine new retailers.

The seeds of the Cerritos expansion were sewn by the 2005 closure of Robinson’s-May. Nordstrom decided to construct its new building – about 20,000-square-feet larger than its current location – at the old site of Robinson’s-May. Mall officials said they have not decided what to do with Nordstrom’s current building once it is vacated.

The mall also was hit by the bankruptcy of Mervyn’s, which resulted in the closure of one of its anchors. However, Macerich recently got a reprieve when rapidly expanding retail chain Forever 21 decided to buy 15 of the shuttered Mervyn’s. Among them is the Cerritos store, which the L.A.-based cheap chic retailer is set to open in the spring.

Besides MAC Cosmetics and True Religion jeans, other shops already booked for the new corridor leading to Nordstrom include fashion boutique Foreign Exchange; Carlton Hair International; and Love Culture, a clothing store for young women and teens. The project is expected to be completed by May.

Jack W. Plunkett, chief executive of Houston-based Plunkett Research Ltd., which studies retail markets nationwide, said it was a good move for Macerich to proceed with the renovation, even if it doesn’t pay off immediately.

“I think it’s smart. A revitalized Nordstrom is going to bring that mall up. It’s an important draw; it means that Nordstrom’s committed and is a key anchor in this mall,” he said.

One of the things Cerritos has going for it, Plunkett added, is a prime location. Sprawled on the county’s southern border along the San Gabriel River (605) Freeway, the mall is highly visible, easily accessible and draws customers from both Los Angeles and Orange counties.

But that also means lots of competition, including Orange County’s luxury South Coast Plaza in nearby Costa Mesa.

“One of the things this expansion will accomplish is to help Cerritos be more competitive,” Plunkett said.

Debt burden

Macerich built up its debt with some high-profile acquisitions.

In 2002, it spent $1.48 billion to purchase nine regional malls and 18 urban shopping villages from Westcor Realty, primarily in the Phoenix area. Two years later, the company paid $2.3 billion for 11 regional malls owned by Wilmorite Properties in New Jersey; Connecticut; and the Washington, D.C., area.

After growing dramatically during the housing boom, the Phoenix economy is now one of the weakest in the country, which has put a dent in retail sales.

Unlike other mall REITs, which have responded to the weak sales environment by selling shares or even paring down their portfolios, Macerich has taken a different path, deciding to form joint ventures.

The strategy began with the sale in late July of a 50 percent interest in New York’s Queens Center mall to Ontario Teachers’ Pension Plan’s Cadillac Fairview Corp. Macerich has completed three such sales, raising $435 million.

Macerich Chairman and Chief Executive Art Coppola said during the company’s second quarter conference call in August that the joint ventures will ultimately reduce the company’s leverage by $1.1 billion.

He also said that at some point in the future, Macerich may consider a stock offering.

So far, both investors and analysts are pleased with the strategy, despite the fact that the company reported a $21.7 million second quarter loss. Last month, the company said it had paid $446 million of its debt due this year, reducing its obligations next year by more than half. Still, Macerich has $30 million in debt maturing this year, plus an additional $269 million due in 2010.

Shares of Macerich closed at $30.02 on Oct. 15, up from a 52-week low of $5.79 in March – but still about half the share price in summer 2008 before the economic collapse.

“The company is healthy in that its properties are generating cash flow,” said Sandler O’Neill’s Goldfarb. “But more than 90 percent of its assets are encumbered; a lot more than we’d like to see.”

Even so, Macerich hasn’t stopped doing business, and not just in Cerritos.

It is proceeding with a $265 million makeover of the Santa Monica Place retail center that began in April 2008. The mall is being made over into an indoor-outdoor lifestyle center adjacent to the Third Street Promenade.

The company recently delayed reopening the mall until August 2010, but when it does open it will have the first Bloomingdale’s SoHo concept store outside of Manhattan and, yes, a new Nordstrom.

“You have to reinvest, redevelop and keep it fresh by bringing in new concepts,” said Cheryl K. Hines, Macerich’s assistant vice president of development.

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