Macerich – The Crown Jewel of Regional Mall REITs

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When activist investors identify and target a company, it is usually for a clear financial reason. This is very apparent in the case of The Macerich Company (NYSE: MAC). In March 2015, the company’s board of directors rejected a bid of US$18.6 billion form its larger REIT competitor Simon Property Group, Inc. (NYSE: SPG) claiming the price was too low. Since rejecting the bid, Land & Buildings and Orange Capital, both activist hedge funds, have pressured MAC to institute changes in their corporate governance. The hedge funds were successful and in early May 2015, Macerich created openings for two independent directors and promised to declassify its board of directors. These changes are expected to clear the path for a potential sale of the company.

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Management’s stance in not selling the company is backed by Macerich’s valuable property portfolio and operational performance. Nearly 50 percent of its malls, classified as Class A+ malls, generate $600 per square foot in sales and two of those properties, Queens Center and Washington Square, exceed $1000 per square foot in sales. Although the company derives more than 70 percent of its net operating income from just 5 states, California, New York, Arizona, New Jersey, and Connecticut, the tenant base is very diversified. Macerich’s largest tenant L Brands accounts for only 2.8 percent of total rents.

Further proof of the company’s strength is evidenced by their Q1 2015 financials. Gross revenues increased by 26 percent when compared with Q1 2014 mainly due to the addition of several properties. Same store net operating income increased by 5 percent reflecting solid growth from existing properties. Macerich’s funds from operations per share increased 6 percent and dividend per share increased by 5 percent rounding out their solid financial performance.

Other operational metrics also came in strong. Sales per square foot for the trailing 12 months have consistently increased since 2009 reaching $607 in Q1 2015. Macerich’s occupancy rate increased from 95.1 percent at the end of Q1 2014 to 95.4 percent at the end of Q1 2015 and releasing spreads increased 20.5 percent for the 12 months ended March 31, 2015.

Management has been prudent in handling the company’s debt with a debt-to-capitalization ratio of 34 percent. The majority of the debt is fixed rate with a weighted average interest rate of 3.49 percent and an average maturity of 5.4 years.

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Currently, Macerich’s price-to-FFO is the highest of its peer group, and with a current share price of $82, the company has been overvalued. Despite the valuation, Simon Properties offered $95.50 a share to purchase Macerich.

This clearly explains why not one but two activist investors have taken an interest in the company.

Source: Macerich website


Written by Heli Brecailo

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