The Macerich Company (MAC) Earnings Call Transcript & Summary

[Audio Gap] Extremely attractive markets with average -- high-average household income, strong agitation levels. Our portfolio is primarily concentrated in California, Phoenix, in Metro New York, through Washington, D.C. corridor, mid-Atlantic regions. Roughly 90% of our NOI in the portfolio is generated from those markets, so very highly desirable markets. The portfolio is extremely high quality. 93% of our NOI is generated by assets with sales volumes exceeding $500 per square foot. The portfolio has shown extreme resilience following the pandemic. Portfolio occupancy today rests at 92%, that's a 3.5% increase in just 5 quarters alone from the low point, which was the first quarter of 2021. Sales rebounded quite nicely in the portfolio. Sales are up 14% at the end of the second quarter. That's compared to the second quarter of 2019 prepandemic. Portfolio sales as a whole are trending at an all-time high at $860 a foot on average. Leasing activity, which Doug will speak to in detail, I'm sure, has been extremely strong. In fact, in 2021, we had a near-historic-high for the company with probably second only to 2015, 6 years ago, historically high leasing volumes. And in fact, 2022 seems like it's on pace to either equal or exceed 2021. Again, I won't steal Doug's thunder. He'll speak to that a little bit more in a bit. In 2021 it's noteworthy that we made very significant progress, reducing our debt on our balance sheet. Reduced the debt by roughly $1.7 billion or 20%. Further progress is yet to be made on the balance sheet as we grow NOI coming out of the pandemic, but significant progress made in 2021. We have significant amount of liquidity today, roughly $630 million of liquidity in our balance sheet. And we are in a very strong operating cash flow position, roughly $240 million of annual cash flow, free cash flow that is after recurring CapEx and after dividend. At today's stock price, our implied cap rate is roughly 9% and that represents less than a 5 multiple on FFO. This relative to a 20-year historically average multiple of over 14x. So I guess I'd conclude and turn it over to you, Craig. And I'd say by all measures it seems we're trading at a massive, massive discount today, Craig.

Okay. I appreciate it. Let's [indiscernible] one thing I just want to start out and [indiscernible] I mean judging from the second quarter results leasing has remained very strong, it's been outstanding. And judging from your $860 sales per square foot, I assume traffic in sales is still [indiscernible] What has happened since, in July, August and first half of September? Are we still seeing that above-average leasing volume and are customers showing any roll back yet for inflation or possible recessionary [indiscernible]?

I can speak, Craig, to the tenant portion of it. And Scott you may want to comment on the sales. But Scott alluded to we've had -- 2021 was a stellar year in terms of leasing volumes. You have to go back to 2015 to see volumes like we produced in 2021. And year-to-date we are on par or little bit better in terms of leasing volumes compared with 2021. And every other week we review and approve deals to go to lease. And at this point in time compared with this point in time 2021, we're 45% ahead of where we were in 2021. So I feel like we're in a really, really good place. I think the elephant in the room is how sustainable is this given what's going on in the macro economy. And I can't speak from a retailers standpoint. But what I can tell the group is that we're talking to the retailers all the time. And as of today, we have not seen a lot of pullback. We attended the May ICSC convention in May, and the retail community was extremely bullish. There was a lot of talk about brand expansions. There was lot of talk about open divides. When we fast forward to what we're going through now, I actually had my team call our top 35-ish retailers and say, hey, we are very optimistic in May given everything that's going on in the world today what are your plans? And again, as of today, we have not seen a lot change in the plan. I think the future is out there and we don't know. But what I can say is we have a very healthy retail environment. Right now a lot of those that were struggling failed during COVID. There is a lot of strong balance sheets. And I think most importantly, the retail unit is taking a long-term view. And if you think about it, we're negotiating leases, we're signing leases now and these stores are going to open mid-'23, late '23, into '24. That's a long time from now. So I think the future is TBD, but right now it still feels pretty good out there.

And I mean -- what is -- I mean, they are obviously hearing about the pending recession and yet they continue to be aggressive. So is it just a matter of we have long-term leasing goals we need to achieve that we can constantly pulled to the side of the road and let a poor market interfere with it? Or do they just think that their merchandise lines aren't going to be as affected in a recession?

I think it's that. I think they're long-term in nature. I think the Macerich portfolio [indiscernible] is a must-have for many. I think the fact that there's not -- there is really no new centers coming online, there's not a lot of options. And to the extent that we have to open up stores, you're talking about 12 to 24 months from now, I think it will still be very opportunistic. I mean it's been a long time. If you think about our portfolio, especially our top 20 centers, for example, they've been 96%, 97% leased forever. Well, fast forward COVID, we've got vacancy back. And for the first time in a long time there is some very good space available and some very good centers. And we continue to see the retail as being opportunistic [indiscernible]

I think it's also important, Craig, just to highlight the backdrop that preceding COVID, multiple years of historically high bankruptcies and then each year seems to surpass the other. So there was a period of time where retailers are rationalizing their footprint, and this is over a 5 or 6 years span, and then COVID only accelerated that plan. So I think today, generally, the retail community finds themselves right-sized but now they're in the opportunity -- they have this wonderful opportunity, frankly, of finding well-positioned real estate that has suddenly come back to us during COVID, and it's a great opportunity for them to grow their brands. So the backdrop, I think, is an important anchor just to figure out where the retailers' heads are. And I think they're well-positioned right now in terms of what your store fleet size is.

Sure. When do you think your overall occupancy may reach pre-COVID levels?

We still think that we'll reach pre-COVID levels by the end of next year. We're at 92% and growing. We look at that almost daily. And the position isn't one of guess work of course; it's one that's informed by all the leasing demand that Doug was referring to. We're well ahead of where we were in 2021. And 2021 was a remarkable year. And all these deals that we're reviewing and going into the pipeline will give us a pretty clear view that we do think that by the time we get to the end of next year we'll be in the 94% realm.

[indiscernible] if I could just follow up on that. I guess we can ask the visibility question [indiscernible] We'll hear from folks that are more skeptical [indiscernible] retailers will just pull back with [indiscernible] I guess are you saying do you feel like you have good visibility now through '22. Are you able to quantify or talk about kind of your '23 lease expiration, what percentage you have done at this point?

Yes, I mean '23, I don't think it's anything different than where we were historically. We're probably about 25% committed right now between signed deals, deals in documentation. It's relatively consistent with where we've been. Again, the view is not only the business that we're reviewing and approving. It's also discussions with our national retailers. I think Doug made a point to expand on that point in our earnings call where he said, look, we've talked to the top 30 retailers in our portfolio. And generally, they're holding firm with their plans. That's what we know today. It's boots-on-the-ground information. Certainly it could change at some point, but we don't see any widespread indication of that.

And I guess this is continuing [indiscernible] we've had it suggested that when the times get tough people just ignore their lease. But I mean, that's not going to be happening with major companies, that's a contract. They're reliable to. It's one thing for a small guy to move out at the end of the night, it's not worth chasing them, but these major retailers, they can't just cancel leases that they've signed.

No, they can. And the lease was certainly tested during the pandemic. It's a once-in-a-lifetime event that certainly hope never happens again. But the lease contract is pretty sacrosanct. And the COVID presented unusual circumstances, which we all had to work through cooperatively as a partner effort. But yes, almost the time the lease stands tall and we have to maintain those leases. Look, retailers are not in the business of contracting and closing stores. They are in the business of maintaining their top line and figuring out how to improve their bottom line, how to improve their strategy and their platform. So they're -- I'm not saying everything is rosy right now, by the way. We're certainly -- we have an air of caution about how we're approaching things. But velocity is really the key right now, get those deals done [indiscernible] because we don't know if things could change, when they would change.

And if your occupancy comes back to pre-COVID level, could we expect to see leasing spreads widen or is that…

Doug, I'll pass that one out to you.

Yes. So the leasing spreads we reported on, it's really kind of backward looking and we've been relatively flat, Craig. What I would say is looking forward, knowing what we know, looking at the negotiations, reviewing deals, what we're seeing is we talked about giving occupancy up, and that was a big goal coming out of the pandemic, real push for occupancy. Well, we got it to about 92%. So we [indiscernible] inflection point where we've taken enough supply off the table, there we can start focusing on rate. And that's really what we're seeing now is for the first time since the pandemic we're seeing competition on space, 2, 3, 4 tenants applying for the same space, and almost by definition that's going to increase rates. So we're starting to see that. And I think that will be reflected in the spreads later this year and into next year. Scot, I don't know if you have any comments.

No, I think you touched on it, Doug.

And the Macerich portfolio has started to bring in some interesting alternative angles to your properties. Maybe you could talk a little bit about whether it's Caesars Republic or Pinstripes, Life Time Fitness. And I'm thinking about the one at Chandler, the…

Scheels All Sports, yes.

Yes, I will comment on that. Doug, feel free to jump in. But Craig, that's been one of the most exciting parts of the business really is, yes, we've gotten anchor stores back, and I think when Caesars [indiscernible] J.C. Penney made announcement [indiscernible] create a panic mode. We, on the other hand, look at it like a major opportunity. So you think about getting Sears box is back and very underperforming, so the nonrelevant anchor and being able to replace it with a Target, for example, or you get J.C. Penney back and replace it with a Target or you get another J.C. These are really examples by the way. You get another J.C. Penney back at Green Acres Mall and replace it with Primark. For a long time, space has been an issue in our portfolio and we're trying to accommodate these large format uses, whether they're entertainment uses, whether they're traditional retail uses, whether it's medical uses, we haven't been able to do that. So fast-forward now and Sears box is back, you're getting J.C. Penney boxes back, you're getting underperforming Nordstrom boxes back. And you referred to Scheels All Sports at Chandler. I mean, there is just so much upside right now in replacing these sort of nonrelevant anchors with really relevant high-producing, high-volume sales [indiscernible] come in and make a big difference [indiscernible] game-changing tenants that we're talking about.

Sure. Scott, in your opening comments you commented [indiscernible] on the progress of the reducing debt. Maybe you can tell us what your refinancing needs for the remainder of '22 and '23 are, and what steps you're going to take to accomplish them.

Yes, sure. Very relevant question, Craig. We've got 5 or 6 mortgages between now and the end of 2023, but fundamentally, it's some pretty high-quality real estate, starting at Scottsdale Fashion Square, which is a massively underleveraged asset, Tysons Corner is in the mix, Green Acres Mall here locally in Long Island and others, Santa Monica Place in Washington Square in the next 2. So we're talking about some of our top 10 assets, right, 3 or 4 of them. It's a difficult market right now, difficult financing market. Mall deals are getting done. In the last, say, 6 weeks, I think 3 mall deals have gotten done. But it's still a very choppy and turbulent market, especially in [indiscernible] We are -- and I say what I mentioned on the call a few weeks ago, we're going to continue to do a combination of extensions as well as short-term refinancings. Short-term SOFR-based loans of 5 years in duration are really what the market is bearing right now. And in cases we will be in the market. We will finance Danbury Fair. And I do expect to be successful on that, knock on wood this year. We're in the market right now on the financing for Green Acres Mall, and I do anticipate going to market soon on Scottsdale Fashion Square. But fundamentally, the NOI that's been created over the course of time and the value that's been created over the course of time is going to put these assets in a position of either matching what's there today, that refinance. We're taking out a little bit of liquidity. But we're going to be very mindful about the cost of that liquidity. So for instance, Scottsdale Fashion Square, we can certainly see a horizon where we say that asset is so massively underleveraged today. We could probably do an execution in CMBS at a very high credit level, which would be very well received by the market and receive the tightest possible coupon, still pull some money out of the asset but not fully recapitalize the asset. It's just not the appropriate environment today to recapitalize. So doing short-term financing, leave some chips on the table. We had a better climate. We fully recapitalize the asset in a few years from now. So that's really going to be the approach, is a combination of extensions of some projects. I think of projects like Santa Monica Place where we still have an anchor box that we're repurposing. And so we're having active discussions with the servicer. I think that hit the tripwire recently that the asset was transferred, it's simply we're working on an extension. And it's an open honest conversation with the servicer, and I think we'll be successful there. In some cases, it will be short-term refinancing like Scottsdale and Green Acres and Danbury Fair.

Would there be a noncore asset sales looking towards this?

Certainly possible. We're always pretty discrete about those until they actually happen [indiscernible] and so it's certainly possible. We're always having conversations. In light of that -- yes…

[indiscernible]

Well, I think if you were to look at Scottsdale Fashion Square today, which has a massive debt yield, if I were to say go to the market at a AAA level, just pick a point, it would still have a debt yield in the mid- to high teens and the coupon would probably be SOFR and something like $250, $275 would be my guess for actually -- I'm sorry, at a AAA level, it could be even tighter, $225 to $250. But that's still months away from execution and hopefully a little bit more.

[indiscernible]

That is more like 30%, 35%. Again…

LTV.

LTV, yes, not the appropriate time to fully recap at a level that we'd otherwise like to in the fullness of time. We'd typically be going to market to recap that at, say, 55% to 60%. So…

[indiscernible]

Could get more, would be much more expensive, correct, so.

[indiscernible]

We'd borrow it at 55% to 60% LTV. I mean, if you would ask me this question, say, even 6 months ago, I would have said we could pull $400 million out, half of which is our share at Scottsdale Fashion Square, but the incremental cost of that capital just doesn't make sense. We've got plenty of liquidity, operating cash flow.

[indiscernible]

Too much that we wouldn't want to do it, put it that way, yes. It would be difficult to execute all the way through the stack. And those last dollars have been very expensive. The incremental cost of capital for those last dollars is just prohibitive today.

[indiscernible]

Well, you know what, you finance it on a more efficient basis. And like I said, if you're leaving some liquidity on the table, you come back in 2 or 3 years. It's a short-term financing, gives you an opportunity to get another bite at the apple in 24 to 36 months when the environment is better. There'll be a CMBS takeout. It would be a refinancing. Yes. Yes.

[indiscernible]

Yes, I mean we typically engage the effort about 9 months in advance, because there's a fair amount of lead time that's involved to get the assets underwritten, to create the prospective lender pool, get them all the way through diligence and ultimately to execute selling the bonds. So it's a fair amount of lead time. We're active on all the things I've been talking about that.

Is there, I mean, a hope of what kind of break away from this just relying on, let's say, the CMBS or [indiscernible] something different?

Well, the difference would be get an unsecured credit, right? And that would be a pretty massive overhaul in terms of unencumbering assets. We also have a fair amount of assets under joint venture. So it will be a pretty radical restructuring. And given our needs for capital and our resources today, we really don't see that that's necessary at this point.

[indiscernible] pound of flesh [indiscernible]

I wouldn't say a pound of flesh. There's really no servicers out there that want to take them all asset back, would just say that. But we continue to work on that box that you're referencing. So it's a very open dialogue about what we plan to do with that box.

[indiscernible]

Yes. And there will be an extension on some basis. And typically that basis is maybe a marginal loan paydown, trapping cash at the asset to make sure you have cash available to redevelop that box. And we're making great progress on the box. Certainly not in a position to comment specifically on that. Once we are, rest assured, we'll be speaking about it. But great progress is being made. And in fact I'd say probably [indiscernible] day goes past where we're not talking about that location. So we've been very successful at securing extensions from both [ Micos ] as well as CMBS servicers. Have every conference in the world we'll be able to get it done.

[indiscernible]

Well, FFO growth was very strong. We obviously issued a lot of stock, which is the reason why we were able to reduce our debt by 20% in 2021. So on a per-share basis, a lot of dilution there. It was painful. It's something we had to do coming out of the pandemic. We're certainly not pressed to issue stock at $9 or $10 a share today given our liquidity, given our cash flow position. But if you look at FFO, just pure FFO and not on a per-share basis, the growth was pretty strong coming in this year.

[indiscernible]

Understood, understood.

[indiscernible]

Yes. Again, we are not.

[indiscernible]

Yes. So our view is NOI growth will be -- it's not going to be at the 6% to 7% clip that it has been coming out of the pandemic, but it will still be strong. And certainly, interest costs, net service costs are going up. So we're going to see some headwinds from that.

[indiscernible] the last 6 weeks that there were a couple mall incidents, which I think [indiscernible] I feel like there was a pause there, any color on those deals?

Yes, there was a bit of a pause and the pause really kind of triggered in June or so and was continuing at the point in time we spoke on our earnings call over the last month, maybe 5 weeks. There's been a few assets that have been financed, one in San Antonio, one in North Carolina. And I think most recently one in New Jersey. So the markets are opening up. And by the way, the markets weren't just shut for mall-based retailers as you guys know everything just -- deals were getting pulled right and left in some of the hottest real estate sectors that there are. So the markets are starting to reopen. I haven't talked to my investment bankers to see what the news of yesterday brought. But it's always exciting. But the markets are certainly opening up a bit, so.

[indiscernible]

I don't have them committed to memory, yes, yes.

[indiscernible]

Are you having any supply chain issues in terms of getting tenants open or are your retailers having any supply chain issues?

Craig, not as much as they have in the past. I will say that we are negotiating longer opening times where it might have been -- the average might have been 90 days, it might be 120 days now or 150 days. But to the extent that there is, and this is interesting, to the extent that there is issues getting supplies to build stores or remodel stores, what we are seeing is retailers asking to push off new models because they can only get X amount of supplies. And their goal, if they have to choose is to open new store. So what materials they can get, they're getting from these stores if it means [indiscernible] remodel 12 months which again I think is a pretty positive indicator of what's going on.

[indiscernible] made that decision.

Yes.

Maybe you could characterize your development and redevelopment pipeline, like what you have, that you are working on. Any big projects on the horizon?

Sure. I'd kind of break it down into 2 different buckets. We've been speaking for quite some time. And in fact Doug mentioned few of the -- larger box deals which is department store that was relatively obsolete, not generating a lot of traffic or momentum or excitement that had been in place for couple of decades, 3 decades. So think of this Sears boxes and couple of Penney's boxes here and there. So those continue at pace, and we're making great progress. Those cash flows will not yet come online until primarily '23 and '24, by the way. Then we've got some of the larger projects where we're getting entitlements or we've secured entitlements and think of projects like Flatiron Crossing in the northern Denver market. We've secured an entitlement to add residential and potentially office, and that could be in a few different forms. It could be a new office, it could be converting existing space to office, but we have an entitlement along with a very attractive public financing package to support that redevelopment. We're working on an entitled [indiscernible] in the Phoenix market to add residential. We're working on Tysons Corner, for yet another phase of bringing mixed use. Lot of flexibility as to what we would bring. But working on numerous entitlements, including others that we've been talking about previously, think of Los Cerritos which is a Sears box that we're looking at a residential campus and some other kind of food and beverage amenities and social gathering places. The key to those projects is securing the entitlement. As to when we bring it to the market, we dictate the [indiscernible] So we certainly have the flexibility to develop whenever we want to. We're not going to push into a bad market and we're going to listen to the market and bring it to the -- the product to the market at the appropriate time.

And do the municipalities take a little bit longer giving you the approval on kind of more alternative…

It is such a mixed bag. We are in so many different communities, and some of it takes a long time. And some they are very receptive and they move very quickly. So I can't generalize it. But when you have shining star examples like that, you're able to get an entitlement done, it makes it really appreciate the city that has its act together, but it's really a mixed bag.

[indiscernible] for the redevelopment.

Well, so again, we've got a fair amount of positive cash flow, right? So that's going to be the primary funding source. Our redevelopment pipeline for the next couple of years is about $150 million on average. So it's not very capital-intensive at this point. At the point in time we decide to pull the trigger on larger projects, then we'll match funding sources to that. In the interim, existing cash flow is sufficient.

Can I ask a follow up on the disposition. [indiscernible] back to market, is that reopening [indiscernible]

Well, most noteworthy was the release of the sale of Santa Anita, which came out about 2 weeks ago. It's the most relevant comp in the mall space in 4 years since 2018, sub-6 cap rate, high net worth individual. Certain facts are still kind of obscure in terms of what their other holdings are and what their background is. But very noteworthy cap rate for an asset that did roughly $600 a foot, a little over $600 a foot, have a sub-6 cap rate. It sounds like some of the motivation there was to redevelop excess land and add mixed uses, which is certainly a theme that we're all entertaining right now. So that certainly drove some of the value there, but wonderful print. So -- but that's really the most note-worthy at this point.

[indiscernible]

Roughly $550 million, $540 million.

$540 million.

Yes.

Is financing in place.

Yes, they put financing in place. It wasn't -- yes, they did. Yes. So they were CMBS existing that they paid off. I don't know. I don't know. Those details are pretty obscure.

[indiscernible]

Well, it wasn't -- again, there's no facts known. The only thing I can tell you is I don't believe it was CMBS. So there's not a lot of facts to discover.

[indiscernible]

Well, that was theirs, so. That was theirs. So it was a nonflagship asset for them.

[indiscernible]

They're trying to sell U.S. and I think they're going to be kind of patient and disciplined, but I'm not in a position to comment. There are things out there, right?

It's not up to us.

Yes.

I think they have set it out by the end of '23. I think that's…

No, they -- yes, but I don't -- I've also heard, that's not [indiscernible]

[indiscernible] I just wanted a quick question on the Philadelphia [indiscernible] part of Fashion District, what you can tell us about that. I know it's a long time off. But did they come to you or did you go to them?

Well, it is a unique, extremely unique opportunity to bring live performance, live sporting venue attached to a mall project. I'm not at liberty to discuss much, Craig. Hopefully, by the end of the first half of next year more details will be able to be disclosed. Certainly we've reached an agreement in principle with them. And to the extended it's successful they would build an arena on roughly 1/3 of what today is Fashion District, on the western most perimeter of the project. And their goal is to activate that for many nights a year, and I can't think of a better anchor to a retail project. Really it could be a massive transformation for Center City and Philadelphia.

Right. Okay. Just one question before we go into rapid fire. What's the major misperception of your company?

That's a great question. We wrestled with that quite a bit in light of what we just spoke about. With the Santa Anita project it's roughly $600 a foot sub-6 cap rate. We're trading at a 9% cap rate today. There's so much focus on net debt to EBITDA, and we understand the leverage is important. But there's very -- there's absolutely no prescription of value within that metric. And it's a one single metric without real discovery in terms of value granted it's difficult to measure loan to value. But I think net debt to EBITDA is just overemphasized in today's world. And I think as a result, our stock is massively discounted. And given how we've recovered from the pandemic and given how the retailers are demanding our space, I would certainly think at this point in time that the stock should be trading better.

Okay. Well, let me go to rapid fire. Which of the following is the greatest macro challenge facing U.S. public REITs today: A, a risk of higher rates; B, the risk of recession; or C, the rise of private equity [indiscernible]

I'd say the risk of high rates.

Okay. 2, which of the following is the greatest sector-specific risk: one, labor issues; 2, supply; 3, capital markets?

Capital markets.

That makes sense given the conversation. And then are you seeing any signpost of weakening demand? I know we touched on it. Yes or no?

No, not at this point in time.

Not at all. Great. Well, I want to thank everyone for coming to the roundtable. I want to thank Macerich for coming out and talking with us. And I hope you will have a good rest of the conference.

Thank you, Craig.

Thanks for having us, Craig.