03/28/2014 | By Sarah Borchersen-Keto
After an active year for disposals in 2013, mall REIT Macerich (NYSE: MAC) remains focused on pruning its least productive assets in order to plough funds back into higher-quality retail developments.
“We want to be the best in terms of quality,” said Art Coppola, Macerich chairman and CEO, in an interview with REIT.com. “We think we’re going to have a powerhouse of a company, and we’re very happy with the direction that we’re going.”
He notes that when the company held its initial public offering (IPO) 20 years ago this month, the company was not even among the country’s top 50 mall owners. “Today, I think the industry would tell you that we’re one of the top three or four,” he said.
Macerich’s rise to the top levels of the REIT industry was underscored last year when it was added to the S&P 500 Index, making Macerich the second retail REIT to be included in the index after Simon Property Group, Inc. (NYSE: SPG). Today the company’s total enterprise value approaches $16 billion, and it has an equity market capitalization of about $9 billion.
Strategy to Shed Assets Launched After Financial Crisis
Coppola explained that the decision to shed lower-quality assets was made in the period following the financial crisis: “We wanted to evolve our company to have a fortress balance sheet, both in terms of assets and liabilities.” Macerich decided it was “time to make a very substantial, transformative pruning of our portfolio,” he added. Since 2009, the REIT has reduced the number of malls it owns from roughly 75 to about 52 today.
During 2013 and the first two months of 2014, Macerich sold slightly more than $1 billion in assets that averaged about $330 per square foot in sales. As a result of shedding these less productive assets, sales at its top 40 centers now average in excess of $600 per square foot. Macerich’s remaining 12 assets, which are “likely candidates for disposition,” according to Coppola, average about $300 per square foot in sales.
At the beginning of 2014, Macerich announced that it would likely sell about $250 million of assets this year. “We’re evaluating right now whether to accelerate the recycling of capital by selling some more of the assets, Coppola said. “There’s a very strong buying market out there for [class-B] malls.”
The decision to accelerate disposals will hinge on whether the opportunity to buy a high-quality asset, or start the development of one, presents itself, Coppola noted.
Focus on Development, Improvements
Macerich has swiftly put the funds that have been accrued from the asset sales back into both new acquisitions and the improvement of its existing properties.
Coppola pointed to the Fashion Outlets of Chicago, which opened in August 2013, as an example of how the company wants to focus on quality. The center is minutes away from O’Hare International Airport, and Coppola said he anticipates that it will become one of Macerich’s 10 most productive developments with sales exceeding $800 per square foot.
Macerich is also busy with a $525 million mixed-use expansion of the Tysons Corner Center in Northern Virginia and a $75 million investment in expanding the Fashion Outlets of Niagara Falls in New York State by 150,000 square feet.
Other projects include the demolition and expansion of Broadway Plaza in Walnut Creek, Calif., in order to increase access for specialty stores. In Santa Monica, Calif., Macerich has received approval to add an ArcLight Cinema to the third level of the Santa Monica Place mall. Coppola said he expects the 1,500-seat movie theater to attract an additional 2,000 to 3,000 people per day to the mall.
At the same time that it has been pruning assets, Macerich has also shored up its balance sheet. Coppola stated that the company has carried out more than $5 billion in financing during the past two-and-a-half years at average interest rates of less than 4 percent. Meanwhile, debt maturity schedules have been extended, and any debt that is coming due during the next three to four years can be refinanced at “dramatic interest rate savings,” according to Coppola.
E-Commerce Seen as Complement to Brick and Mortar Strategy
As Macerich cements its position in the top tier of retail mall operators, the company is continuing to adjust to the rise of e-commerce.
Coppola describes e-commerce as a “complement to the brick and mortar strategy” of retailers. In other words, as retailers increase their web sales, they are also eager to have flagship stores in the best-located malls, according to Coppola. “Clearly the e-commerce sites make our retailers stronger overall, and it does make the A or A-plus locations more valuable to them,” he said.
As demand for top locations increase, supply has become constrained, Coppola points out.
“There are really very few A-quality malls that can or should be built over the next five to 10 years. The suburban sprawl of the 1970s and 1980s is over,” Coppola said. “People are moving back into the core of the cities, so that’s part of our strategy of wanting to be in the middle of density.”