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Macerich: ‘We Are in a Much Better Place Than Many Think’

While rival shopping mall owners file for bankruptcy and cut jobs, The Macerich Co. appears to be recovering.

Speaking on a call with investors Thursday, CEO Tom O’Hern acknowledged that the mall REIT, which owns 51 million square feet across 47 properties, experienced a “challenging” Q3.

“The second quarter was an extremely unique quarter, and some of the second-quarter challenges carried into the third quarter and may even carry partially into the fourth quarter,” O’Hern said. The REIT reported a net loss of $22.2 million for the quarter ended Sept. 30, versus net income of $46.4 million in the prior-year period.

Still, as of the end of Q3, things appear to be looking up for Macerich. Following the reopening of three indoor malls in Los Angeles County on Oct. 7, all the company’s properties are now open. By October, sales were up to 90 percent of pre-Covid levels for centers open at least eight weeks, O’Hern said.

“The second quarter was more about getting centers open and getting our tenants open safely and less about leasing,” O’Hern said. “The focus in the third quarter is collecting past due rents and starting the shift back to leasing.”

Rent collection improved in Q3 for Macerich, averaging around 80 percent—81 percent in October—compared to approximately 61 percent in Q2. Both these numbers are far above where Macerich stood in April, when it collected just 26 percent of total rents.

O’Hern said the company had generally come to terms with most of the tenants who did not pay rent during the closure period. “Generally, we agreed to rent relief, usually in the form of deferred rent for the closure months with repayment in 2021, in many cases in exchange for landlord-favorable amendments to leases.”

Foot traffic is generally running at about 80 percent compared to a year ago, partly due to capacity limits, according to O’Hern. Despite this lower traffic, sales only shrank to around 90 percent of 2019 levels.

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Doug Healey, senior executive vice president, leasing, dissected this disconnect between traffic and sales. “Our shoppers are converting more; they’re not necessarily going to the mall as much, but when they’re there, they’re buying,” Healey said. A lot of the pre-purchase research is now occurring online, he added, so that when consumers come to the mall “they know what they’re there for and they buy it.”

“Make no mistake, traffic is important, there’s no denying that,” Healey said. “However, I do think it’s time we stop thinking so one-dimensionally and focus on other metrics, in addition to simply traffic. And when we do, I think we will all find that we are in a much better place than many think.”

According to Healey, occupancy at the end of the third quarter was 90.8 percent, down 3 percent from a year ago and 50 basis points below last quarter. This was primarily due to store foreclosures from bankruptcies and from local tenants who could not survive the pandemic, he said.

These closures did not all come as a complete surprise. The bankruptcies and tenant failures Macerich saw these past eight months, O’Hern said, would have likely happened over the course of the next two or three years. According to Healey, of the 38 or 39 bankruptcies that Macerich saw this year, only six or seven weren’t on the company’s watch list.

While some retailers are closing, others are adding locations. “Since the retailers have opened—and as I mentioned been trading for 60, 90 days—and understanding that they can get back to 90 percent of where they were last year, the interest has really started to peak,” Healey said.

Healey said Macerich opened 44 new tenants and 276,000 square feet in the third quarter, accounting for $11.3 million in total annual revenue.  This represented 65 percent of the openings Macerich saw in Q3 2019, but 15 percent more square footage and “virtually the same total annual rent.”

O’Hern acknowledged that this year’s holiday season will be different, with shorter operating hours and lowered capacity. However, with people not spending on vacations and entertainment during Covid, he said most consumers in Macerich’s markets will have money to spend.

As of Sept. 30, the shopping center owner had $630 million in cash and cash equivalents on hand, up from $573 million at the end of June. Macerich declined to provide official guidance, but O’Hern said the company expects the fourth quarter and the year 2021 to be much better than Q2 and Q3 2020. Scott Kingsmore, senior executive vice president, chief financial officer and treasurer at Macerich, said the company plans to provide guidance on 2021 this time next quarter.

Additional reporting by Jessica Binns.