EUR 850.00 For Business Accounts Only

Morningstar | High-Quality Malls See High Sales Growth, Driving a Strong 3Q for Macerich

Retail continues to be strong in 2018, leading to mall operator Macerich beating our top-line and bottom-line estimates in the third quarter. Sales per square foot for in-line tenants were up 7.3%, driven by 10.5% growth from the unconsolidated portfolio although the consolidated portfolio was still up 4.1%. Occupancy was up 80 basis points sequentially to 95.1%, beating our estimate of a 25-basis-point decline. Releasing spreads slowed down more than we expected at 10.9% for the quarter, leading to average base rent growth of 3.8%. However, occupancy costs declined to 12.9%, the lowest point in six years, so Macerich's tenants may be healthy enough to sustain continued double-digit releasing spreads for a few more years. Same-store net operating income was up 3.7%, better than our 3.3% estimate for the third quarter. The NOI beat led to a funds from operations beat with Macerich reporting $0.99 funds from operations in the quarter, a one penny beat over our estimate. Macerich did lower the high-end of its FFO guidance for 2018, which lowers the midpoint from $3.87 to $3.845, but that is still 2% above our estimate for the year. We will maintain our $59 fair value estimate and narrow-moat rating.

Macerich has 21 Sears locations and we believe that Sears' bankruptcy finally unlocks the potential growth of these assets. Of these assets, nine are owned in a 50/50 joint venture with Seritage, seven are owned outright by Macerich, four are owned by Seritage, and one is owned by Sears. Seven of the joint venture assets are marked for closure, one of the wholly owned locations is already closed and the Sears owned location is already closed. Eleven of the Sears locations have no co-tenancy clauses while the other 10 locations have an immaterial number. While some tenants may exit their leases as a result of a Sears closure, we doubt many depended on Sears for their survival given how little traffic a Sears anchor generates and we think any anchor replacement would greatly enhance the traffic and asking rents of nearby in line stores. For several of the sites, management is planning to demolish the box and repurpose the space into a mixed-use development. Macerich estimates that their pro rata share of redevelopment projects to replace Sears will be in the range of $250 million to $300 million over the next three to four years and we think they can get at least 7% redevelopment yields on these boxes.

We continue to observe that higher quality malls in Macerich's portfolio outperform the lower quality malls. Macerich breaks up their portfolio into buckets sorted by their sales per square foot. The trophy level assets in the Top 10 bucket produced sales per square foot growth of 12.5% and the Class A malls in the Top 11-20 bucket produced sales per square foot growth of 4.3%. Meanwhile, growth in the Class B and Class C malls in the Top 31-40 bucket and the Bottom 5 bucket was flat year over year. These numbers continue to demonstrate that there is a bifurcation in mall growth between the top-quality assets that make up the majority of Macerich's NOI and the lower quality assets that Macerich has been pruning from the portfolio over the past five years.