The Macerich Company (NYSE: MAC): Executing a Strategic Plan to Simplify, Improve Operations, and Reduce Leverage

Published on September 24, 2024 | Ticker: MAC

The Macerich Company (NYSE: MAC) is a fully integrated, self-managed, and self-administered real estate investment trust (REIT) that owns and operates high-quality retail properties in densely populated and attractive U.S. markets. With a portfolio of 45 million square feet of real estate, primarily consisting of 42 regional retail centers, Macerich has established itself as a leading player in the retail real estate industry.

Financials

In the first quarter of 2024, Macerich reported quarterly revenue of $208.8 million and a net loss of $131.4 million. For the full year 2023, the company generated annual revenue of $881.4 million and a net loss of $274.1 million. Despite the challenging market conditions, Macerich's operating cash flow for 2023 remained strong at $295.5 million, while its free cash flow reached $136.0 million.

Recent Developments

Macerich's new President and Chief Executive Officer, Jackson Hsieh, has wasted no time in implementing a strategic plan to simplify the business, improve operational performance, and reduce the company's leverage. Hsieh's vision is to transform Macerich into a hospitality-focused organization that provides an exceptional experience for both tenants and customers.

Strategic Plan Components

One of the key components of Hsieh's plan is to simplify the business by selling non-core assets and consolidating certain joint venture interests. The company has identified approximately 10 properties, including both stronger and weaker assets, that it plans to sell or hand back to lenders over the next 3-4 years. This strategic repositioning is expected to result in a 100-basis-point reduction in Macerich's leverage ratio.

In addition to asset sales, Macerich is focused on improving its operational performance. The company is targeting a $70 million increase in incremental rental revenue from its current executed lease pipeline, which is expected to be realized in 2024, 2025, and 2026. Macerich is also working to backfill vacant anchor spaces, particularly those left by the recent bankruptcy of retailer Express, with new and exciting concepts such as Dick's House of Sport and Lifetime Fitness.

Reducing leverage to the low-to-mid 6x range is a major priority for Macerich. In addition to the asset sales and NOI improvements, the company plans to issue up to $500 million in new equity, which is expected to reduce leverage by two-thirds of a turn. Hsieh believes that by executing on this plan, Macerich will be able to improve its cost of capital and position the company for future growth and acquisition opportunities.

Business Overview

Macerich's portfolio is geographically diversified, with a concentration in California, the Pacific Northwest, Phoenix/Scottsdale, and the Metro New York to Washington, D.C. corridor. The company's top markets include Los Angeles, Seattle, Phoenix, and the New York metropolitan area, which collectively account for a significant portion of its overall revenue.

In terms of revenue breakdown, Macerich's primary source of income is leasing revenue, which accounted for 91.8% of total revenue in the first quarter of 2024. Other revenue streams include management company revenue (3.9%) and other income (4.3%). During the first quarter, leasing revenue decreased by 3.7% compared to the same period in 2023, primarily due to decreases in the Same Centers and Disposition Properties, partially offset by an increase in the JV Transition Centers.

Financials

Macerich's financial ratios reflect the challenges the company has faced in recent years. As of March 31, 2024, the company's debt ratio stood at 0.60, while its debt-to-equity ratio was 1.92. The company's interest coverage ratio was 2.01, indicating that it is able to cover its interest expenses, but the ratio is lower than industry benchmarks. Macerich's liquidity position remains strong, with $120.1 million in cash and cash equivalents and $464.9 million in available capacity on its revolving credit facility as of March 31, 2024.

Outlook

Looking ahead, Macerich has withdrawn its previous 2024 funds from operations (FFO) guidance due to the uncertainty surrounding the timing and impact of its strategic initiatives, including asset sales, joint venture consolidations, and potential property givebacks to lenders. The company expects the bankruptcy of retailer Express to have a negative impact of $0.05 to $0.06 on 2024 FFO, with the potential for an additional $0.06 to $0.08 impact on an annualized basis.

Conclusion

Despite the near-term challenges, Macerich remains optimistic about the long-term prospects of the business. Hsieh's strategic plan, which focuses on simplifying the portfolio, improving operations, and reducing leverage, is designed to position the company for sustained success in the evolving retail real estate landscape. As Macerich executes on this plan, investors will be closely watching the company's progress in achieving its financial and operational goals.

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