Macerich: A Bright Spot in Retail REITs?

Who says it's all doom and gloom in the retail sector? Santa Monica, Calif.-based mall owner Macerich had a pretty darn good fourth quarter, considering that we're in a recession. The firm proves that even in this economy, in a troubled sector, some operators can get it right if they have a history of good planning and restraint.

The firm owns 72 malls across the country, some of which are among the highest performing and best known in their geographic regions, including Santa Monica Place near LA, Scottsdale Fashion Square in Arizona and Tysons Corner Center in Northern Virginia.

Some financial highlights of their quarter include posting a 43 percent increase in funds from operations, a REIT-specific earnings measure that sets aside depreciation and amortization. Additionally, net income came in at $63.2 million, rising from $39.9 million in the prior-year period.
Even Macerich's down numbers weren't that down. Year over year occupancy during the fourth quarter only dipped from 93.1 percent to 92.3 percent. With the non-stop bad news of store closures, that's not a significant dive. By contrast, high-end mall owner Taubman Centers, which is based in Bloomfield Hills, Mich., and has 24 properties across the country, posted a 90.3 percent vacancy rate in its fourth quarter.

Macerich's 43 percent increase in FFO also outpaced another well-performing competitor, Simon Property Group. Simon, which holds the largest U.S. mall portfolio with 386 properties, reported a 6.5 percent FFO gain in the quarter.

So why is Macerich holding up so well? Location, location, location. Many of the company's malls are like Queens Center in New York, which is the only game in town for miles around in very densely-populated area. It's a strategy that the firm has followed for years, and the payoff is really showing in this economic landscape.

Macerich is also getting leases signed in this tough environment, and the 231,000 square feet of tenants signed during the quarter were at a rate 23 percent higher than those stores with expired terms -- remember, this is how a landlord makes money. The Scottsdale and Santa Monica malls just announced 15 lease signings between them today alone. This comes back to location. Obviously Macerich malls are some of the few places in the country where barely expanding retailers still feel they need to be.

And while several of its peers aggressively built new developments across the country over the past few years, leaving them with overextended construction pipelines and charges on canceled building plans because of overextended construction pipelines, Macerich moved with much greater restraint. A Bank of America/Merrill Lynch report points out that Macerich's "redevelopment capital is earmarked for three high quality assets which minimizes the risk in our opinion."
Finally, it helps that the firm isn't saddled with crippling debt, like General Growth Properties, the one-time mall giant that is now gasping for breath. Macerich has "done a good job refinancing existing debt, a trend that should continue in '09 and '10," BofA/Merrill notes.