Macerich Co.'s latest joint venture—awith real estate investment management firm Heitman announced last week—is further proof that the regional mall REIT made the right call by deciding to forego equity offerings to pay down debt, according to analysts.
Throughout 2009, Santa Monica, Calif.-based Macerich has been forming joint ventures with different partners to raise equity to pay down upcoming loan maturities. The strategy is a different path than many other retail REITs have opted to take. Most retail REITs have gone through at least one round of stock and debt offerings since the first quarter and some have opted to sell assets outright.
Macerich, on the other hand, has opted for the joint venture route for a couple of reasons. The firm's executives believed in its assets and did not want to sell at distressed prices or issue equity in a climate where they felt the REIT's share prices were depressed. The joint ventures, then, could serve the purpose of raising equity while simultaneously illustrating to the market the true worth of the firm's assets. Furthermore, joint ventures are nothing new for the company. It has a long record of joint ventures and thus was in a strong position to revisit the strategy in the current climate.
That strategy has worked, analysts say. In the process, it has driven up the value of Macerich's stock, likely making a potential stock offering more successful. At the opening of the trading day on Monday, Macerich stock was trading at $28.05 per share, up more than 400 percent from the 52-week low of $5.20 per share.
The most recent deal was announced on Oct. 1. The Macerich Partnership, the operating arm of the Macerich Co., and-based Heitman announced they were entering a joint venture for two Macerich malls—the 1.7-million-square-foot Freehold Raceway in Freehold, N.J. and the 1.3-million-square-foot Chandler Fashion Center in Chandler, Ariz. Both properties are considered to be class-A assets, with occupancy levels above 90 percent. As part of the transaction, Heitman agreed to purchase a 49.9 percent stake in the malls and assumed a pro rata share of the property level debt. In exchange, Macerich received $167.5 million in net cash proceeds and the ability to continue managing the malls. This will allow the REIT to reduce its leverage level, without giving up control of its assets.
Macerich already entered several joint ventures this year, including one with Cadillac Fairview Corp. for the 966,499-squre-foot Queens Center in Queens, N.Y. By the end of the second quarter, the company had raised $225 million through such transactions. Macerich is under some pressure to raise cash to deal with upcoming debt maturities, including $759 million coming due in 2010 and $3 billion coming due in 2011. At the end of the second quarter, the REIT's total debt to capitalization ratio stood at 76 percent, according to SNL Financial, a Charlottesville, Va.-based research firm. At the time, the median total debt to cap ratio for REITs was approximately 55 percent.
"I don't think [six months ago] anybody really knew what the best route was" for raising cash, says Rich Moore, an analyst with RBC Capital Markets. "Macerich took a little bit of a chance, because [back then] the world looked pretty scary. Normally, I would say just go ahead and issue the equity. But you've got to give them a lot of credit; they were right on."
During the REIT's second quarter conference call, on Aug. 4, Macerich chairman and CEO Art Coppola, estimated that joint venture transactions will help the company deleverage by up to $1.1 billion. Coppola also indicated that Macerich was discussing doing a stock offering at some point in the coming months, but did not set down a timeframe.
"We believe that [common equity] should be the final piece of the equation of a deleveraging process, after other pieces of the puzzle that we have total control over have been put into place," Coppola told analysts during the call.
Part of the reason Macerich has been putting off a stock offering, according to Moore, has been its desire to drive up its share price through the joint venture transactions. The pricing the REIT has been able to achieve on its assets—which Coppola indicated has been in the 7 percent range—has convinced market participants that the firm holds a strong class-A portfolio.
"My personal opinion is that the issuing of the stock is probably a better way to go because you de-lever much quicker and you don't have to give up control of some of your highest quality assets," says Moore. "That said, Macerich did an excellent job, because if they issued equity, they would [have to] do that at $6 per share."
Still, with the REIT's upcoming debt maturities, most analysts say Macerich will have to do a stock offering at some point as the proceeds of the joint ventures will not do enough to get its balance sheet in order. More than 56 percent of the REIT's total debt is coming due in 2010 and 2011, notes Jason Lail, senior real estate analyst with SNL Financial. "The joint ventures are helpful, but I would expect that this, in combination with an offering, would be their best bet to reduce that much debt."