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Morningstar | Class A Malls Produce Another Strong Quarter for Macerich

Macerich produced a very solid first quarter that came in well ahead of our assumptions. Despite the strong quarter, we don't anticipate changing our $57 fair value estimate for the narrow-moat company, given that management maintained its conservative 2019 outlook. Macerich's tenants produced sales per square foot of $746, increasing 8.7% over the first quarter of 2018, and occupancy costs for tenants remained at 12.4%, well below the company's historical average. Occupancy rose 70 basis points year over year to 94.7% compared with our estimate of a 75-basis-point decline. Re-leasing spreads were up 11.0%, leading to average base rent growth of 3.9%. Same-store net operating income was up 0.6% in the quarter and 1.7% when excluding lease termination fees, ahead of our estimates. The portfolio's outperformance, Sears continuing to pay rent on its closed stores (the leases are now expected to be rejected mid-May) and lower-than-anticipated interest expense led to Macerich reporting funds from operations of $0.81 per share for the fourth quarter, $0.05 ahead of our estimate.

One thing we will continue to monitor is how Macerich is able to lease up the space returning to it due to bankruptcies. Of the 407,000 square feet of space leased to tenants that are going through bankruptcy procedures, 85% are leased to the four tenants that Macerich had identified as likely to close stores in 2019. While Macerich has so far been able to backfill approximately 55% of that space, the new tenants are short-term replacements that are paying only a third of the rent that Macerich is losing. While Macerich was able to lease 825,000 square feet across the whole portfolio in the first quarter, suggesting that it can handle filling a large amount of space in a given quarter, we will have to see if and when it is able to find permanent, long-term replacements that can pay market rents.