The country’s biggest mall REIT, Simon Property Group, may be angling to buy smaller competitor Macerich, industry insiders say. The move would allow Simon to grow at a time when opportunities for new mall development remain few and far between.
On Nov. 19, Simon revealed that over the course of the previous 11 months it had bought 5.71 million common shares of Macerich, equal to a 3.6 percent stake in the company. Simon executives are also considering asking Macerich to waive its excess share provision, which caps share ownership at 5 percent, the company disclosed. Macerich has previously approved the acquisition of 10.9 percent of its shares by another investor.
At the end of the day Wednesday, Macerich shares were trading at $76.91, near the company’s 52-week high of $79.43 per share.
“It certainly appears that Simon could be interested in acquiring Macerich and it’s a way to strike up that dialogue,” says Jason Lail, senior research analyst with SNL Financial, a Charlottesville, Va.-based research firm. “The portfolios are certainly complementary—Macerich focuses on class-A malls in some of the same markets as Simon, giving Simon a lot of additional exposure” in cities such as Phoenix.
Speculation that Simon may be looking to buy a rival mall owner is not entirely unexpected, given that the market currently offers limited opportunities for regional mall REITs to grow. With its portfolio occupancy already in the high 90 percent range and low same-store sales growth, Simon doesn’t have much leeway for a drastic improvement in property fundamentals. Growth through property-level acquisitions remains challenging, as few class-A malls are being put on the market. Simon does have several new outlet centers in the works, but regional mall development, its bread-and-butter, is expected to be almost non-existent for the foreseeable future.
“Net new mall supply will likely be negative for the next several years as more malls will close rather than open,” according to an Oct. 22 note from Green Street Advisors, a Newport Beach, Calif.-based research firm.
“The bottom line comes down to ‘they are just not building,’” says Todd Sullivan, general partner with Westborough, Mass.-based Rand Strategic Partners and author of the blog Value Plays. “And for Simon, it makes more sense to buy one of these smaller players than go out and build one or two malls from scratch.”
The right fit?
After Simon spun off its smaller malls and shopping centers into Washington Prime Group earlier this year, drastically reducing its size, Sullivan doesn’t anticipate any objections from the Federal Trade Commission to a potential merger with Macerich.
A more pressing concern may be that the Macerich mall portfolio is somewhat of a mixed bag, compared to Simon’s properties, which tend to be some of the best performing malls in the country. For the third quarter, ended Sept. 30, Simon reported occupancy of 96.9 percent and sales of $613 per sq. ft. for its mall and premium outlets portfolio. Simon currently owns 112 regional malls, 68 premium outlets, 13 Mills properties and 15 other shopping centers in the United States and Puerto Rico.
During the same quarter, Macerich, which owns 52 malls, reported occupancy of 95.6 percent and sales per sq. ft. of $571.
Recently, however, Macerich has been diligently improving its portfolio. The REIT’s initiative to dispose of lower quality malls has been largely completed, according to a Nov. 2 note by RBC Capital Markets analyst Rich Moore. (The company may yet decide to sell another 12 properties it considers non-core, Moore adds). NOI growth on its top 40 assets has reached 4.1 percent year-to-date and will likely average between 3 percent and 4 percent in the next few years. Macerich boasts a sizeable development and redevelopment pipeline, with $1 billion in projects underway and another $230 million scheduled for the future.
In addition, on Nov. 17, the company revealed it bought out its joint venture partner in five high-profile superregional malls, including Queens Center in New York City, Washington Square in Portland, Los Cerritos Center in Cerritos, Calif., Stonewood Center in Downey, Calif., and Lakewood Center in Lakewood, Calif.
“Macerich’s much improved portfolio appears very well positioned for sustained NOI growth,” Moore writes. “At the same time, the company’s external growth pipeline already includes a number of large developments and redevelopments, along with additional projects announced on a regular basis.”
It’s also worth noting that Macerich boasts a much cleaner balance sheet than most REITs in the regional mall sector, with a debt to overall market cap ratio of 33 percent, compared to the sector average of 43 percent, adds Lail. “I think their performance is indicative of a strong, well-managed portfolio,” he says.
In Sullivan’s view, at least half of Macerich’s existing assets should fit seamlessly with the Simon portfolio, while Simon may choose to either spin off or dispose of the lower-quality centers.
“Absent construction of new properties, the only way to grow is to acquire,” he notes. “So then it’s a question of ‘How do we maximize our portfolio and do it in a way that’s financially prudent?’ Even if Simon did purchase the rest of Macerich, I am certain they would immediately divest the lower quality malls and move on to the next potential seller. This is really the only way to go.”