It was 1994 and Swedish pop group Ace of Base had released a chart overtaking The Sign, fed funds rates peaking at 6.50%and the North American Free Trade Agreement entered into force during the first time. Macerich (New York stock market :Mac) would go public this year, marking a milestone in a story that would be punctuated by tragedy, lost dreams, and a constant fight for survival. Co-founded in the 1960s by Mace Siegel and Richard Cohen, whose first names combine to form Macerich, the company would quickly build 18 shopping malls, all of which had a well-established discount store as their anchor tenant. The anchors would act as magnets for the clients to form a symbiotic relationship with Macerich.
The fate of the company has always been linked to the financial viability of its anchor points. Of the initial 18 band centers belonging to Macerich’s first iteration, 16 were anchored by Arlan’s. A discount chain that began to suffer towards the end of the decade and would file for bankruptcy in 1973 and then for a possible liquidated in 1975. Even in his founding years, Macerich was plagued by the workings of capitalism. A type of creative destruction that would see the old swept away after being disrupted by the new.
Arlan’s would be the first of a long list of later anchors from JC Penney to Sears that would go bankrupt in the following decades. Indeed, the new millennium would usher in the Internet and a more rapidly accelerating world into a new force of creative destruction posed by the development and proliferation of the Internet. That didn’t stop it from reaching all-time highs just before the 2008 global financial crisis, highs Macerich would flirt with again in 2016. But this year has seen record retail bankruptcies. Aeropostale, Vestis Group, Sports Authority. It was an era of great change comparable to the same disruption that saw shopping malls proliferate and trade out of urban centers in the years following the end of World War II.
Retail bankruptcies, a blessing in disguise?
Macerich’s earnings for its third quarter of fiscal 2022 saw revenue reach $210.7 million, a slight 0.7% decline from the year-ago quarter, but a $6.97 million beat on consensus estimates. This was driven by a 30 basis point sequential increase in portfolio occupancy to 92.1% from 91.8%. The portfolio saw average sales for tenants under 10,000 feet of $877 per foot, a new record with footfall returning to around 95% of pre-pandemic levels. Macerich tenants continued to realize healthy customer demand even in a gloomy macro environment, with year-to-date comparable tenant sales up 5% year-over-year and up more than 13% from the pre-pandemic fiscal year 2019.
Leasing activity was strong with 219 leases for 1.1 million square feet executed during the quarter. This resulted in NOI growth at the same center of 2.1% over the prior year period, with FFO at $0.46 per share, broadly flat sequentially, but a slight increase from $0.45 in the quarter of the previous year. This supported a quarterly cash dividend payout of $0.17 per share, a 13.3% increase from the previous dividend. There’s more room for that to grow with overall business performance compared to the generally quite healthy pre-pandemic numbers. The current quarterly payout is still more than 70% below pre-pandemic averages.
During the first-quarter fiscal 2017 earnings call, ex-CEO Arthur Coppola said retail bankruptcies were a blessing in disguise as it allows Macerich to redevelop a space currently occupied by a company swept away by creative destruction. Accordingly, the company continued to focus intensely on redevelopment during the quarter with a number of projects underway, including the transformation of approximately 150,000 square feet of space formerly occupied by Bloomingdale’s at Santa Monica Place into a new destination with a high-end fitness club and co-workspace. The company predicts it will cost $35-40 million with an estimated return of 22-24%.
For the full year 2022, Macerich lowered its FFO forecast to between $1.93 and $1.99, down from its previous range of $1.92 to $2.04. This is down $0.02 per share from the mid-term FFO forecast and reflects broad economic uncertainty as we close out the year.
Will stocks ever go back to 2016?
Mark Twain, a famous American writer and humorist, in response to a British journalist who contacted him to ask if the rumors that he had died were true, responded by stating that these reports of his death were exaggerated. Otherwise, how would one respond to a journalist who seeks comment on his own death? Macerich has faced and will continue to face a similar conundrum. This tale of creative destruction has been part of his life since its inception, accelerated by the pandemic, but which Macerich has seized upon to reinvest time and time again.
The company is currently trading at just over 10% off its tangible book value of $13.48 per share at the end of the quarter. The increase in the dividend and the continued strength of leasing would have made it possible to close this gap. But the high probability that the United States will enter a recession next year probably justifies a level of discounting. Macerich continues to be a company that will survive change, but stocks are unlikely to see 2016 again until sentiment improves and corporate redevelopments fuel growth.