Macerich Company (MAC)

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Santa Monica, CA-based Macerich Company (MAC) is a real estate investment trust (REIT) that owns and operates shopping centers throughout the US. Macerich's properties are concentrated in Arizona and California, and in 2005 it acquired competitor Wilmorite's foothold of properties in Virginia and New Jersey. Macerich focuses on high-performing markets - its tenants averaged sales of $472 per square foot in 2007, well ahead of the national average of $398 - and this lets the company charge above average rents to the tenants in its portfolio.^[1][2]

As of year-end 2007, MAC owned 74 regional shopping centers and 20 community shopping centers with approximately 78 million square feet of gross leasable area.^[3] MAC's malls, in addition to their location in high-growth suburban markets, are typically large enough (almost 900,000 square feet on average for the company's wholly owned regional shopping centers) to be considered town centers.^[4] High foot traffic to these centers help MAC's tenants meet their sales numbers and allow MAC to continue to charge high rents on its properties.

The commercial real estate market has suffered in 2008, due to the weakening U.S. Economy.^[5] This is a risk to MAC, as the retail stores that its tenants operate focus on consumer luxury or discretionary goods. When compared to other retail REITs, MAC is in in the middle of the pack in terms of size and the breadth of its geographic focus, but it differs from its peers by focusing on markets with higher per capita income. MAC expanded aggressively in 2007, acquiring over $900M in new properties. It is likely to continue this expansion in 2008, with a $536M development pipeline, although a credit crunch may be an obstacle to financing these projects.

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Trends and Forces

U.S. Economic Cycles Will Lead To Fluctuating Revenues

• MAC’s properties consist mainly of retail space, making the company especially vulnerable in a general economic downturn. If consumer spending levels decline, demand for MAC's properties will decrease as retail businesses will contract rather than expand. Slow demand lowers the rents that tenants are willing to pay for MAC's properties.
• Mac's centers are particularly prone to economic hiccup, as they charge above average rents. They are able to do this because of greater than average sales per square foot, $468 in 2007 vs. a national average of $398.^[6][7] Its tenants are also focused on consumer luxury items such as designer apparel, jewelry and electronics. In 2007 its top tenants in terms of revenue were: Mervyn's, Gap (GPS), Limited Brands (LTD), Foot Locker (FL), AT&T (T), Abercrombie & Fitch Company (ANF), Luxottica Group, S.p.A. (LUX) and Zale (ZLC). These retailers traditionally see decreases in sales as shoppers’ discretionary income declines. If tenants in MACs centers start seeing slower sales, MAC is likely to see demand for its properties drop as tenants move to less expensive centers.
• MAC has leases on 50.6% of its gross leasable area (GLA) expiring by 2012.^[8] If, when these leases expire, MAC offered discounted rents on space to increase occupancy levels during an economic down cycle, the effects would likely be seen over a number of years. This is because leases with smaller tenants usually last for at least a few years, and leases with anchor tenants (large stores which occupy a large portion of a property's GLA) can last much longer. If these leases were signed when rents were lower, MAC will see lower income over the life of the lease.

Economic Changes in the Southwest Will Affect Mac's Revenues

• A large portion of MAC's retail centers are concentrated in the Southwest United States, primarily Arizona and California. It also has eight centers located in Connecticut, New York and New Jersey.^[9] Because of this regional concentration MAC is particularly vulnerable not only to changes in national economic conditions, but to any regional economic changes. Any change in general economic conditions on a national, regional, or local scale which adversely affects MAC's tenants will decrease the amount of base rent, expense reimbursement and overages the company receives from its tenants, as all of these are tied to tenant performance. As the economy worsens there has been an increase in retailers failing to renew leases or, through bankruptcy protection, cancelling leases.^[10]
• MAC is somewhat insulated from the risk that a single tenant company will become insolvent and cancel their leases, as the company's top five tenants account for only 10.8% of rent.^[11].

Increasing Competition From Discount Stores Has The Potential To Adversely Affect Anchor Tenants’ Ability to Meet Lease Obligations

• MAC operates regional and community shopping centers, which are facing increasing risk from outlet stores, discount stores, and other retailers. As these competitors gain market share, they adversely impact the ability of MAC's tenants to pay rent, and decrease MAC's collections of base rents, expense reimbursements and overages. MAC's centers feature retail anchors such as Macy's Inc. (M), Sears Holdings (SHLD), J.C. Penney (JCP) and Dillard's (DDS).^[12] During difficult economic times many consumers switch from these mid market retailers and purchase goods at big box or discount retailers such as Wal-Mart Stores (WMT) and Target (TGT). Many mid market retailers have been experiencing difficulty and are closing stores or filing for bankruptcy protection. ^[13]
• Though no single tenant pays more than 3.3% of base rent at MAC's centers, this is not the full picture of the risk that one of the company’s tenants will cancel their lease obligations. MAC's centers use anchor tenants, large tenants which occupy a large portion of space and draw other tenants to a property. Many of MAC's anchor tenants own the properties in which their stores are located in. Though anchor tenants accounted for only 4.9% of minimum rents in 2007,^[14] MAC's anchor tenants occupied over 40 million square feet of space at its properties.^[15] MAC's top five anchor tenants account for almost 80% of total space occupied by its anchor tenants.^[16] This concentration increases the harm to MAC if one of those companies were to cancel leases or cease operation. If one of MAC’s largest anchor tenants decided to close down its stores it would impact not just one but many of MAC’s centers.
• If an anchor tenant cancels their lease or become insolvent, not only would MAC lose the base rent, overages, and expense reimbursements from that single tenant, but its smaller tenants would suffer from the decreased foot traffic. Leases for smaller tenants in a retail center often contain clauses allowing for lease terminations or rent reductions if an anchor tenant leaves the property. If an anchor tenant left the property, smaller tenants have the option to cancel their leases rather than wait for MAC to locate a new anchor. Because of this, the abrupt departure of anchor tenant can drastically decrease the value of a retail center.

The Credit Crunch And Fluctuating Interest Rates Increases The Riskiness of Mac’s Debt Payments

• MAC has approximately $5.8B in outstanding debt, 16.6% or $1.0B of which is variable rate debt.^[17] The interest rates MAC pays are primarily based on a certain spread the company pays above LIBOR. If rates were to increase, MAC will see an increase in its variable rate debt payments, lowering its cash flows and income for the period.
• Most of MAC's variable rate debt is subject to cap agreements, which state the rate on the debt will not go above a certain level. This limits MAC's potential losses due to interest rate fluctuations, but these caps are typically set above interest rate levels when the cap was established, leaving potential for loss.^[18]
• Interest Rate fluctuations are also an issue as MAC has approximately 76% of its debt maturing by 2012.^[19] If interest rates rise MAC will have to refinance maturing debt at unfavorable rates - in the case of fixed rate debt, this would lower the company's cash flow over the life of the loan.

A Credit Crunch Makes it Difficult For MAC To Continue Its Expansion

• Rising interest costs would make it more costly for MAC to issue new debt, as they will have to provide a higher return. As discussed above MAC relies on new debt to fund its expansion. The unavailability of credit or higher interest rates are an obstacle to the firm’s growth.
• MAC also faces the risk it will be unable to refinance the $683.4M in debt maturing in 2012.^[20] If MAC is unable to refinance this debt it will be forced to sell assets at unfavorable terms, decreasing the company’s returns. This also means the company will have fewer assets available to use as collateral for secured loans, decreasing its access to secured debt.

Competition

MAC competes with numerous other firms to both acquire properties and lease tenants. Competing REITs include:

• Simon Property Group (SPG) Simon property group owns 320 income producing properties in 41 states and Puerto Rico. It operates 184 regional malls, as well as outlet centers, community lifestyle centers and other shopping centers. It properties contain approximately 242M square feet of gross leasable area.^[21]
• General Growth Properties (GGP) owns and operates over 200 regional malls in 45 states.^[22]
• Taubman Centers (TCO) has a portfolio of 23 properties mostly consisting of super-regional malls with more than 800,000 square feet. ^[23]
• CBL & Associates Properties (CBL) is an active developer of new regional malls, open-air centers, lifestyle and community centers that owns, holds interests in, or manages 159 properties including 86 enclosed malls and open-air centers. Their strategy focuses on acquisition of regional malls.^[24]

The table below provides competitive data comparing GGP with some of its close competitors.

Market Share

In 2007 MAC's market share among global Retail REITs was just 4%. Market share is listed by Funds From Operations (FFO), a metric that takes into account earnings from existing properties but not cash from acquisitions or sales of assets. Globally there are 38 REITs focusing on retail properties producing an aggregate $10.0B in FFO.^[45][46]] Most of those were small companies, only 9 Retail REITs are listed in the Russell 1000.

• General Growth Properties (GGP) has ownership interests in and/or management responsibility across regional shopping malls totaling over 200 million square feet of retail space with 24,000 retail stores and anchor department stores, as well as theaters, sit-down restaurants, ice skating rinks, and other forms of family entertainment.^[49]

• Westfield Group ((WDC) is the largest retail property group is the world with a portfolio of 119 shopping centers across Australia, the U.S., New Zealand, and the United Kingdom, valued at $53.2 billion.^[50]

• Kimco Realty (KIM) is largest publicly traded owner and operator of neighborhood and community shopping centers in the U.S., with more than 1,519 properties comprising 180 million square feet of leasable space across 45 states, Puerto Rico, Canada, Mexico and Chile.^[51]

• Simon Property Group (SPG) develops and leases regional malls, shopping centers and strip malls. Simon Property Group owns or has an interest in over 379 properties comprising over 256 million square feet of gross leasable area across investments in the U.S., Europe, and Asia,^[52] making it the largest public U.S. real estate company.^[53] Simon Property Group's investments tend to be in large metropolitan areas with very high consumer traffic and are comprised of anchor department stores alongside smaller retailers.

References

1. ↑ 2007 Annual Report, Letter to Shareholders Page 11
2. ↑ Akash, Dave; Morningstar Analyst Note, May 2007
3. ↑ Reuters
4. ↑ 2007 Form 10-K Page 22
5. ↑ Barbaro, Michael "Retailing Chains Caught in a Wave of Bankruptcies" The New York Times, April 15th 2008
6. ↑ 2007 10K Page 25
7. ↑ Akash, Dave; Morningstar Analyst Note, May 2007
8. ↑ 2007 10K Page 10
9. ↑ 2007 10K Page 14
10. ↑ Barbaro, Michael "Retailing Chains Caught in a Wave of Bankruptcies" The New York Times, April 15th 2008
11. ↑ 2007 10K Page 7
12. ↑ 2007 10K Page 7
13. ↑ Barbaro, Michael "Retailing Chains Caught in a Wave of Bankruptcies" The New York Times, April 15th 2008
14. ↑ 2007 10K Page 10
15. ↑ 2007 10K Page 11
16. ↑ 2007 10K Page 11
17. ↑ 2007 10K Page 53
18. ↑ 2007 10K Page 30
19. ↑ 2007 10K Page 53
20. ↑ 2007 10K Page 53
21. ↑ Reuters
22. ↑ Reuters
23. ↑ Hoovers: Taubman Centers company overview
24. ↑ CBL Properties company website - About Us
25. ↑ Google Finance
26. ↑ Google Finance
27. ↑ Reuters
28. ↑ 2007 10K Page 22-26
29. ↑ Google Finance
30. ↑ Google Finance
31. ↑ Reuters
32. ↑ Reuters
33. ↑ Google Finance
34. ↑ Google Finance
35. ↑ [1]
36. ↑ [2]
37. ↑ Google Finance
38. ↑ Google Finance
39. ↑ Reuters
40. ↑ Reuters
41. ↑ Google Finance
42. ↑ Google Finance
43. ↑ CBL Properties company website - About Us
44. ↑ CBL Properties company website - About Us
45. ↑ U.S. Global REITs
46. ↑ [2007 Company Annual Reports]
47. ↑ Datamonitor Industry Market Research: Global - Retail REIT's
48. ↑ [2007 Company Annual Reports]
49. ↑ VNO Company Site - About Us
50. ↑ Westfield Group company website - Company Profile
51. ↑ Kimco Company Website - About Kimco
52. ↑ Simon Property Group company website - About Us
53. ↑ Simon Property Group company website - About Us