The Macerich Company (MAC) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to our conference meeting with the Macerich Company Macerich is an owner, operator and developer of top retail and mixed-use destinations in major U.S. markets. With us today, we have Tom O'Hern, CEO; Scott Kingsmore, Senior Executive VP, CFO and Treasurer; Doug Healey, Senior VP and Head of Leasing; as well as Jean Wood, VP of Investor Relations, and Samantha Greening, Director of Investor Relations. Before I turn it over to management for his opening remarks, I want to remind everyone if they want to ask a question, please use the Veracast software to input your questions at the bottom of the screen. We will be looking for these questions and asking them on your behalf. I will now pass it to Tom to start us off with an introduction overview for Macerich. Tom?

Thanks for having us today, Craig. It's good to see everybody. I wish we were all in person, but perhaps next time. As Craig said, we're regional REIT. We own 45 regional town centers, mostly in California, the Pacific Northwest, the Northeast and Phoenix. Today, we're focused on densifying and diversifying our top assets will be less apparel and more mixed-use and nontraditional retail. We're adding hotel, multifamily, office and co-working, health, wellness and fitness, experiential food and beverage. We're also selling opportunistically non-core assets to redeploy that capital into our diversification efforts. This year, including Monday's announcement of the sale of La Encantada, a lifestyle center in Tucson, we have sold over $285 million of non-core assets. As we come out of the pandemic, we are seeing a very strong leasing environment, and we'll hear more on that later. During the first half of the year, for example, we signed leases for 1.9 million square feet. That's 35% more than we signed in the first half of 2019. So we're not comparing ourselves here to 2020. We're comparing ourselves to 2019, and we are clearly back and above pre-COVID levels. In fact, July sales were up 18% -- that same tenant sales up 18% compared to July of 2019. So it's safe to say the consumer is back in shopping with vengeance. And with that, I'll turn it over to you, Craig.

Okay. I guess hitting on that same point, a lot of focus. This summer really benefited retailers and landlords with higher traffic, higher sales and really strong leasing metrics. We're just wondering, has the Delta variant and the recent COVID cases, had any impact on transit? And how are you seeing any hesitancy from retailers in terms of leasing new space?

Well, Craig, actually, as we read about the rent, we had some concern, but in reality, traffic did not slow down. In fact, it increased in traffic, which had lagged a little bit coming into the summer has actually now caught up with the 2019 traffic numbers. So sales are ahead of 2019. Traffic is caught up to 2019. And as we saw Delta spike at various places throughout the country, it really didn't change the activity level in some jurisdictions. There were masking requirements, minor inconveniences, frankly, after all we've been through the last 19 months. And frankly, the retailers are eager to open new stores, and I'll let Doug comment on the volume we're seeing here in a second. Their biggest issue is not -- it's not opening safely, their biggest issue is getting their employees back to work. That's the biggest challenge for a lot of our retailers who are hiring minimum wage entry-level people and they're having some difficulty there. But they resolve their supply chain issues and they're back, they're open, they want more. Doug, feel free to elaborate.

Yes. Thanks, Tom. Craig, we've seen no decrease in retailer demand during this period at all. In fact, year-to-date, we've signed more leases and leased more square footage than we had in 2019. And 2019 was a very, very strong leasing year for us. In fact, we're on target, we're on par right now to have our best leasing year since 2015. Our pipeline is full. We still have another 400,000 square feet to open yet this year and about another 1.5 million square feet to open next year. And that number continually increases every other week as we continue to improve deals. Our 2021 lease expirations are in really good shape. 85% of our expiring square footage is committed in terms of fully executed leases or leases out for signature and the remaining 15% is in the LOI stage. So the metrics really speak for themselves. The demand is there. We haven't seen it diminished nor do we see it diminishing.

Great. And Doug, I'm wondering, given this kind of a high level of leasing volume, is it a growing universe of tenants? If so, who are some of the tenants entering the market? Or are you also stealing market share from tenants looking to trade up to make search property?

That's a great question. So that's the biggest difference. Craig, coming out of this crisis versus coming out of the great financial crisis years ago. Coming out of that, we had a vacancy issue, and we were basically leasing to sort of the same old retailers that we went into the crisis with. Biggest difference these days -- nowadays is that we've got a whole different universe of uses we call them. It's not just traditional retail apparel will always be an important merchandising initiative. But now we're leasing to additional uses like fitness, like grocery, food and beverage, hotels, hospitality, office, residential. So as we layer these different uses into traditional retail, we're really creating and envisioning our shopping malls transforming to real town centers. And that's really the difference between now and then, and that's the exciting part of our business today.

And maybe talk about some of the anchors you're bringing in Shields and Chandler. You have a couple of Primarks, talk about that as well as what you, think the pace of department store closings might be in 2022?

Sure, Craig. Happy to touch on that one. Actually, it's been very much a positive for us. You mentioned Shield. So that's a situation where Nordstrom had closed their store. Shields came in, they took the entire 200,000 square foot space and they're going to open the first of their stores in Arizona. Shields is it's really sporting goods extravagant. If you took a Dick's Sporting Goods, a Bass Pro and the best of the local sporting goods times 3, that's what you have with Shields. They just have a fantastic presence and presentation. It's very experiential. I think one of the more recent ones they've opened is in Dallas. And if you were to visit that store, the first thing you would notice when you walk in is a 2-story ferrous wheel right in the middle of the store. They've got a float plane hanging from the ceiling, just truck full of inventory. It's an incredible tenant, and it's going to do at least 5x the sales volume that Nordstrom did. So very, very excited about that, big improvement for the center. You mentioned Primark. Primark has come in. We've done quite a few Primark deals. I think we've done 10. They've all done very well, primarily in the East. They took a couple of our recent vacancies that went in. They're just recently back this week, opened in Philadelphia to a great welcome there and a great opening. So they've been a good addition. We have not seen this year, a lot of closures. We've got a couple of JCPenney stores back, and they've immediately been backfilled, one with Primark. And the second, we haven't announced the anchor, but we've got a traditional value anchor that's going to go in there. So we haven't had any problems feeling. In fact, the problem is selecting the right solution. And Doug can elaborate a little further, but we've really been blessed to have some good opportunities to remerchandise some of the department stores that we have gotten back.

Yes, Craig, it is interesting. As announcements are made that Sears is closing a JCPenney closing or more notable Nordstrom is closing the media might think -- might make you think that the world is coming to an end or it's the shopping centers in trouble. But as we look at some of these anchors that have closed, especially the ones that didn't perform, we really view them as an opportunity. I mean it does take an anchor to close to come up with a square footage to accommodate Shields, to accommodate a Primark. Most recently, in a perfect example is in Deptford, New Jersey, where we lost a Sears store and immediately backfilled it with the Dick's Sporting Goods and Round One, a very easy fix, but more importantly, a much better-performing anchor, if you will, than Sears was doing at the time. So we're really viewing these as opportunities in our portfolio.

And then just thinking back to Shields. Is it going to have a broader trade area than Chandler has overall, just given the uniqueness and experiential aspect of the center?

Well, there's no question about it, Craig. I mean if you think of a Cabela's or a Bass Pro, they drop from a very big trade area. I think we've only got 1 in all of Los Angeles County, for example. So it's going to be -- they're going to draw probably from the greater Phoenix market. We can't think of them as a traditional type of anchor, they're going to have a much bigger trade area.

Okay. And then one of the things that we've seen in 2021 as an unusually low number of store closures. I know you have spoken to this in the past. Do you see this trend continuing into 2022 with the lower store closings?

Well, what really caused it, Craig, is we had an acceleration of bankruptcies in 2020 due to COVID. So we always have a watch list of tenants that we're worried about. And those tenants, we would have expected under normal circumstances without the pandemic to have gone bankrupt or at least be challenged in 2020 through 2024. Well, when COVID hit, they all went through 2020. So we had an acceleration of the bankruptcies. The watchlist got substantially shorter. And as a result, we've seen very few failures in 2021 and I would expect to see that carry into 2022 as well. Hard to say beyond that. But certainly, this year or next, I think we'll see the benefit of that.

Great. Great to have that tailwind. And then in terms of the transaction market, how has that changed over a year ago? Are you seeing more product brought to the market for sale and maybe differentiate A malls from B malls?

Yes. We're not seeing a lot of product even today, Craig. I mean, we've done a couple of transactions, but they've been non malls, Paradise Valley, which is really a land play that will be primarily residential and La Encantada, which is a lifestyle center. So we haven't seen a lot of activity in the A quality space. There was a portfolio of malls that was exposed to the market pre-COVID and that got pulled. But we haven't really seen any activity. Now on the B malls, that's an entirely different landscape. And you see several large nonpublic funds have stepped into a couple of the companies, primarily WPG and CBL. So there may be some activity there, but it's a little too early to tell.

Okay. And then maybe touch on the La Encantada sale in Tucson. It looks like a very strong well-leased property. I'm just wondering if you thought you took it as far as you can go and as such part of the non-core assets?

Craig, La Encantada, it's a lifestyle center, frankly, it's really lifestyle center we have -- It was part of the Westcor portfolio that we bought in 2002. And it's a good asset. It's in Tucson, which is not a core market for us, and we didn't really have the ability to densify and diversify that asset. So good asset. There was some strong interest. We sold at a very attractive price. I'm not at liberty to say what the cap rate was, but it was very attractive. So it made sense for us to cash out of that one and redeploy the capital into our diversification projects.

I thought I saw it looked like it was selling for higher than $600 a foot, so a very good transaction. What else is in your non-core bucket that you could use towards disposition?

Well, there's a lot of assets. If you look at what we historically would rank our assets based on sales per foot, 1 through 45 and the bottom, 15 or so are all unencumbered, and we have the ability to sell those and consider any of those potentially to be noncore. And it just depends on when the market comes back. I would say, in general, the market is back for those, but we'll see it. We saw it coming out of the great financial crisis. In fact, from 2012 to 2015, we sold 25 malls, lower-quality malls, bottom third of our portfolio and we're able to sell those when the market bounced back. So I think we'll have the opportunity here. It may not be in 2021 or 2022, but we're going to see it.

And how would you compare coming out of the recession through the COVID situation versus the Great Recession? Are you seeing a different pattern of Merge as we reopen?

Well, I think the biggest thing to the positive, Craig, is I'd say we have a much stronger leasing environment today. We had a dip in occupancy coming out of the great financial crisis. We were down to about 89%. I think coming out of COVID, we were 88%. But again, we're in a very low economic period of time coming out of the financial crisis and it affected us for a lot longer period of time. So we didn't go in as fast as we did To COVID, and we didn't come out of it as fast as we're coming out of COVID. I mean today, we've got so many new uses to lease to that we didn't have in 2010 and 2011. So it's a much more robust leasing environment, I would say, today than what we faced coming out of the financial crisis. To the negative, I would say the debt markets aren't as good today for our sector as they were coming out of the financial crisis. Again, that will change. We see it improving almost weekly, and Scott can elaborate on that a little bit. It's getting better by the week by the month. Scott, you might want to give a little color here on that.

Yes, sure. I'll step in. Tom. So Craig, we are negotiating documentation for refinancing of 2 near-term maturities, those being the shops at Atlas Park in New York, the Queensborough as well as FlatIron Crossing. So we are getting some activity there. The debt capital markets as we look at them, the first deal started to come out in the fourth quarter, and they're extremely low leveraged on extremely high-quality assets. And we've seen that migrate over the course of time to the quality spectrum dropping into the $600 a foot range. We've seen loan to values tick up to 55%, 60%, 65%. We've even seen within the last few months, some instances of large over borrowers or cash outs to the borrower. So the conditions continue to improve to underscore what Tom said, the debt capital markets aren't back to what they were, certainly, but there is a bit out there, and we are getting activity we do believe we'll be successful refinancing both of those assets I mentioned for the existing loan amount with a little bit extra.

Okay. Great. I have a couple of questions from the field. It says. He think he said '21 expirations were 85% committed. He was curious on what the expirations committed were in 2022? And then what about leasing spreads on 2022?

In 2022, Craig, we're about 33% to 35% committed in terms of fully executed leases and leases out with another 56% in the LOI stage. And I'll let Scott comment on the spreads.

Yes, as far as spreads are concerned, look, our trailing 12 spreads are relatively consistent with what was expiring, they're flat. But we are seeing things start to change given the level of leasing demand in many instances, competition per space. We are seeing some positive improvement in leasing spreads. It's too early to say where 2022 is going to land. As we came out of COVID, but our first initiative was to grow occupancy. Certainly, that is going to be the most impactful driver of same-center NOI. But we are conscious of the price impact of growing that occupancy. And it seems like we're in a better position than what we thought we'd be a few months ago as it relates to being able to push rate. So we're optimistic that by the time we get to 2022, we'll see some nice lease spreads. Bear in mind also, during COVID, we did negotiate some short-term renewals because we felt in certain instances, the renewal rates we were getting were not commensurate with market. And so we do think we'll be getting another bite at the apple in '22 and in 2023 and to renew those leases at significantly great rate. So I think we're going to see some nice spread activity coming from those renewals.

Great. And then can you speak to your current net debt-to-EBITDA ratio? And what range is Macerich comfortable operating in and some of the near-term changes to that ratio?

Yes, sure, Craig. If you look at what we've done in the last 5, 6 months, a lot of heavy lifting. We've issued stock. We've closed asset sales, including La Encantada and Paradise Valley as well as numerous land sales. In total, we generated about $1.1 billion of liquidity from all those transactions I just mentioned. And we've repaid about $1.4 billion of debt. So a lot of activity in just less than 2 quarters. As we look forward, one of the bigger focuses in terms of improving leverage is regrowing our EBITDA, regrowing the NOI that we lost during COVID. So given the level of leasing demand we see in our ability to absorb vacancy, we think there's a great opportunity to improve leverage just from growing NOI organically. Just based on some conservative estimates, we do believe that our current mid-9s net debt to forward EBITDA could get to 8x by the end of 2023. And then as we look forward in terms of long-term targets, 7% to 7.5% seems to be a reasonable target to operate our portfolio. And I think those targets are achievable again, coming off some post-COVID low's with NOI will have a great opportunity to improve leverage just by organically growing income streams within our portfolio.

In addition to that, we've got about $200 million of cash flow after the dividend, and that's available for delevering as well.

Great. And what are your target volumes for annual development and redevelopment? And what are your projected years for those projects?

So Craig, as you probably know, when COVID hit, we slammed the brakes on the development pipeline. And that's getting started again. We're going through entitlements on a couple of big projects, Washington Square and Los Cerritos. So I don't think we're going to have a big spend in 2022. It's going to be somewhere around $100 million, maybe a bit more. And then I think by 2023, we'll be back to our typical range of $150 million to $200 million on an annual basis.

And maybe talk about Santa Monica Place, your redevelopment releasing of Bloomingdale and the Arc Cinema?

Yes. Thanks, Craig. So that's a pretty unique situation. Santa Monica Place sits right where one of the train lines ends, a couple of blocks from the ocean, in Santa Monica. And Bloomingdale's was never really very successful there. I mean it just wasn't a good fit for them. But they've got a great location. They had 2 stories, and then we were able to recapture the ArcLight Cinema space, which sits above Bloomingdale's. So we've got 3 levels there, and it's currently being marketed for creative office. You'll recall what we did at Westside Pavilion where we converted that along with our partner, HPP. We converted it to creative office, and it is in the process of becoming Google's Southern California headquarters. Similar demographics also close to a train station. So far, we've seen pretty good demand in the marketplace. And hopefully, we'll have some exciting news on that to announce in the near future.

Great. And when does Google open at One Westside?

That will be in the fall of next year. It's the plan, and it's -- currently, it's ahead of pace. So it could be a little bit earlier than originally expected. I think we originally had it slated for October, maybe a little bit earlier than that.

Yes, it's a great location for that. And then are you able to engage in any focus or curbside feature? I see when I go to your mall locations, there's a number of retailers say they do have curbside or pick up in store businesses that they can now -- the consumer can refer to?

I mean we try to accommodate them wherever possible. It varies location by location. But obviously, that's been a big part of what they've done during COVID. And we've also been working with a number of companies to try to provide fulfillment centers at our properties. And that's still in the early stages. But I think ultimately, that's what, what you'll see, you'll see fulfillment centers at most of our malls where -- that way the retailer doesn't have to staff up their own department to handle opus, they can use the fulfillment center. And that's what we're in the midst of evaluating now. What we found during COVID is that the department stores did a pretty good job of it. But the individual smaller retailers, when they try to do it on their own, they were kind of overwhelmed. So we're in the midst of trying to find a solution for that. But I think it's here to stay. Doug, you want to elaborate on that at all?

No, Tom, I think you're spot on. It was very, very difficult for the in-line retailers to do it. It was more successful with the department stores and those that had access to the parking lot. But clearly, buy online pickup in-store was successful for all aspects of retail. And the consumer benefited from it because there was a speed of delivery, the stores benefited because there were attachment sales. And quite frankly, we benefited from it because it brought people to the stores who then went out into the malls and shops. So to Tom's point, it's not going away anytime soon. I think we'll see it expand.

Great. And then maybe just a little bit about Los Cerritos. Your plans for the mixed-use densification, I know you're thinking of hotel and entertainment. But just what are your top properties, what you're going to bring to Los Cerritos?

So Craig, that's a great example of densifying and diversifying. That center has plenty of retail today. Sitting at one end of that project was a big Sears box along with a freestanding Sears building. And we're going to demolish the Sears. As I said, we don't need more retail there. And we're going to put in anywhere from 600 to 800 multifamily units, probably a hotel, may do a few other things that are potentially in fitness center. And we're working through entitlements on that now. So great project. We're very excited about. And for us, there's a lot of ways to do multifamily. We could either contribute the land and take a percentage of the multifamily. We could sell the land to a multifamily developer. We can do ground lease. So there's a lot of alternatives there depending on the economics, and we're working through all that right now.

Okay. Great. And then maybe if you could talk a little bit a bunch of ESG efforts and maybe hit that you're most proud of?

Yes. Thanks, Craig. I mean it's really something we've been focused on for the last 10 years. In fact, NAREIT gives an award every year for the leaders in environmental -- Leader in the Light Award. And Macerich has won at 6 of the last 7 years. I think the only year we didn't when it is we didn't put an application in and they wanted to spread the wealth a little bit. But we've been very focused on that for a long time. A couple of stats that we like to mention is we're currently ranked 24th on the EPA Green Power partnership top 30 list of U.S. companies providing on-site generation of green power, and that's out of 700 companies in all different types of sectors, not just real estate. We generate a significant amount of solar power from our California properties. In fact, in 13 properties where we generate solar power, we generate in 17 million kilowatts of green energy. And to give you a frame of reference, that's enough to power almost 2,200 homes for the entire year. So we rank highly our ISS ranking is a 2 on ESG. We've opted out of, Moody's. We've done a number of things on the government front that has put us better rank than most REITs, frankly, and continues to be a big focus. Our plan, our environmental plan going forward is to be carbon neutral by 2030 and has 0 waste -- 0 net waste by 2030. So it's ambitious, but I think we can do it, and I think you're going to continue to see us be a leader in this area.

Great. And then I think at this point, I want to turn it to the rapid fire questions. We have 3 rapid fire questions. The first one is which is the following -- which of the following is the greatest challenge facing U.S. REITs today: a, Fed action and higher rates; b, supply chain issues and including labor and logistics in that; and then c, flow to non-traded REITs?

I would say in our sector, it's b, Craig, supply chain issues as well as getting employees back to work. I mean our business is all about sales and sales are going great. But to the extent the retailers are restricted and what they can do, it's going to have a varying on our business. But I think they're well along the way to solving that.

Okay. The second question is over the next 5 years, which market will outperform urban coastal or Sunbelt, so of the 2 markets, which will outperform urban coastal or the Sunbelt?

I'm a little biased here, but I'm going to go with urban coastal.

That's a good choice for you. No. I hear you. And then the third question, for your company's office plans, and this is Macerich. Post-pandemic, will you: a, have no changes from pre-pandemic: b, leave it up to the team; c, offer hybrid; or d, go full remote?

Okay. So this is going to be a little bit longer than just picking A, B, C or D, Craig. We've gone through a very thoughtful process with the leaders in the company to evaluate what we've learned from COVID, what the good things were from the pandemic. We very successfully worked remotely. We managed to make it through the pandemic without doing any layoffs, ever people busy. And we came back realizing that some of the departments can operate fairly effectively without being in the office full time. So we're going to be a hybrid across the board. I suspect that some of the back office functions would be along the lines of 2 or 3 days in, 2 or 3 days out. to the point where they could actually share space with somebody else who was working on alternate days. So we're going to be hybrid. I don't think we're going to need as much space as we had before. I think we can probably reduce by 35% and that's our model going forward.

It sounds like you put a lot of thought on it. Now just coming to the end, I just want to -- we talked a lot about things that may search may different from peers. But in your mind, what is the most significant difference between you and all the other retail REITs out there? What is that significant difference that people think about when they think of Macerich?

Well, I think we've got the highest quality real estate portfolio. When you look at our locations, look, we went to great lengths to dispose of non-core assets, lower productivity assets in 2012 through '15. We sold 25 malls. We've got a very pure A-quality portfolio, domestic portfolio. We've got the ability of the 45 assets we have at 30 of them, we have the ability to densify and diversify and just improve the quality, improve the sales and improve the traffic. And I think that's fairly unique. There's not a lot of public A mall companies out there anymore. And we're one, and we think, we're unique given our size and given our geographical locations where -- with the exception of Phoenix, we're bicoastal, and we're in very, very strong markets, and we've got a great portfolio. And after many -- after 3 or 4 years of facing headwinds, we finally have some tailwinds, and they're pretty significant right now. So we're looking forward to that.

Okay. Great. Well, I see we're coming up against the end of our time. So I want to thank Tom, Scott, Doug as well as Samantha and Jean who were on screen for us for green to do the roundtable. I hope you have a great rest of the year, and I hope you have a great rest of the conference. And again, thank you for being to participate.

Well, thank you, Craig, and thanks, everybody, on the call for joining us. Appreciate it. I hope to see you live soon. Take care.