Macerich 2Q16 Earnings Call Notes

Macerich’s (MAC) CEO Arthur Coppola on Q2 2016 Results

Thomas O’Hern

Financing market remains very good

“The financing market for high quality regional malls remains very good. We have closed or committed on two life company deals and we’re currently in the market with a large CMBS deal. On May 27, we closed a $375 million financing on North Bridge Mall that fared – there was a 12-year fixed rate loan at 3.68%, and we used a portion of those proceeds to pay off the old loan, which was $188 million with an interest rate of 7.20%. And that was a life company transaction, another life company deal, which we’ll be closing here in the next week or so. It is at The Village at Corte Madera. We’re putting a $225 million fixed rate loan in place, and that’s a 12-year deal, fixed at 3.50%. Again some nice financing at historically low levels in terms of the interest rates.”

CMBS has improved

“Well, I think the market has gotten stronger. It is subject to being more volatile than the bank market, the life company market, but in this particular case, Fresno is a very strong asset, as you said, doing over $600 in sales, and we got bids from probably eight different investment banks and they’re all pretty competitive in the range of $200 million over the underlying treasury. So it was good to see, it was encouraging to see, and I think that at the moment is a viable form of financing for probably A – A minus to B plus assets, some A assets may be competitive, it’s a big deal, it’s roughly $350 million deal. So we’re encouraged, but we’re not looking for a lot of CMBS loans right at the moment. So I’m not sure we’re in a perfect position to say exactly how deep it is. But for a quality asset, certainly they’re right at the moment, Rich.”

Robert Perlmutter

We see many online companies building out the infrastructure for brick and mortar locations

“Within the last category of online retailers, we see many companies building the infrastructure to open brick-and-mortar locations in a traditional store rollout program. Some examples of this includes Blue Nile, Amazon, Peloton, Warby Parker, and Bonobos. We are also focusing on bringing online retailers into the centers by reducing the physical and economic barriers to entry. Examples of this strategy includes stores such as Combatant Gentlemen, Blink, Beta and WithMe. It is clear, the universe of online retailers will expand in our shopping centers. Some will take a traditional approach to store rollouts, and others will be nurtured through non-traditional canvassing and deal structures. This represents a growing opportunity within our portfolio.”

Arthur Coppola

Many investors wonder whether we can maintain positive rent spreads

“I want to touch upon a topic that has been – a justifiable topic in terms of questions that a lot of investors and the analytical community has asked themselves and that has to do with rent spreads and whether or not in an environment where you have decelerating sales or sales that are not growing like that used to grow, can you continue to have rent growth in the manner that we’ve enjoyed and our peers have enjoyed over a long period of time.

We think there’s supply constraint in Class A malls

“As you look at our property type and you look at regional Class A malls and you think about the universe of the supply of that product, the supply of that product is, let’s say, that it’s 400 or 500 regional malls. And when we think about that product type in terms of supply, we can look to by analogy High Street retail, which is also a very low supply, high demand sector. And there have been studies that have been done – more studies that have been done in the regional mall Class A sector as it relates to High Street that it is a property type that has shown significant well above average rent growth over very long periods of time.”

There are plenty of companies expanding

“When we think about the demand side of the transaction, in terms of tenant demand for space, a lot of folks tend to focus on the one or two names that have gone bankrupt recently or the one or two names that people are worried about going bankrupt. But they tend not to focus on the 30 or 40 or 50 names of retailers that have got brand extension or are just growing their portfolio or now with the recent events with Brexit, we have tenants that have got global expansion plans that are upping their expansion conversations about their expansion in the U.S., which is creating incremental demand.

The trouble with department stores isn’t mall traffic, it’s the other way around

“You think about other factors that may or may not influence our demand, and people worry at times about department stores. And we’ve had more than one of our department stores and so the problem with their sales is mall traffic. Mr. Les Wexner had a great quote on this point and I’ll probably butcher it, but basically he said the trouble with department stores is not mall traffic, the trouble with mall traffic is the department stores. What he is basically saying is the department stores are not pulling their weight.

We think Westside Pavillion in LA is great opportunity

“ure. We see it as a great opportunity. It’s tremendous piece of real estate and it’s part of our core holdings. We have no intention of chasing the same customer that literally The Grove and Century City and Santa Monica Place and Beverly Center and [indiscernible] everybody is chasing the same customer, the high end affluent customer in the West LA market. And we think that there is a different mousetrap that can be created at Westside. We are not in a position to say exactly what that’s going to look like, but we’ve got at least four or five different development alternatives that we’re thinking about, each one of which are very interesting.