Malls (Short "A" Hot Mess?)

Macerich Co. Reports Earnings

Macerich Co. ($MAC) reported earnings earlier this week with some very mixed-to-negative results. The company reported decreases in revenue (-$63.4mm YOY), net income (-$370mm YOY), Funds From Operation (-$25mm vs. Q4 last year), and occupancy (-40 bps YOY). Lease termination fees increased by $3.6mm for Q4 vs. a year prior. Lease duration fell a bit for the under-10ksqft segment, averaging five years rather than 5.4 in Q3. But average rent for leases signed during the TTM was 4.6% higher. And releasing spreads were sound, both of which seem to indicate that the company is able, for the most part, to replace bankrupt tenants with higher paying (yet shorter duration) tenants. Some other highlights, 

• "Bankruptcies in 2017, totaled 850,000 square feet, including 160,000 square feet in the fourth quarter. This was an increase from the previous year level of 500,000 square feet." 

Interestingly, the Macerich folks took as a sign of strength that the beginning part of '17 saw a lot of retail liquidations but the latter part saw more reorganizations. While this is true, it may not hold. See "Chapter 22 (Retail)" in "Fast Forward" below. More from the company,

• "Our outlook for 2018, I would say at this point as you can tell from our guidance is cautiously optimistic. I am much more positive as I look into 2019 and 2020. The reason I am cautiously optimistic for 2018 is that when you get hit with unexpected bankruptcies like we did in 2017, and you do business in high barrier-to-entry cities, many of which are hard to get entitlements in even for the tenants that are replacing existing tenants and you own assets where the rents are extremely high, so you are talking major commitments. You don't go ahead and just turn on the switch and replace that vacancy overnight. It takes six to 24 months; especially when someone is thoughtful about curating a tenant mix with the replacement tenants that will complement the balance of the center." 

So, where does Macerich execs' '19 and '20 optimism come from? As the share of direct-to-consumer digitally-native-vertical-brands piece of digital e-commerce increases from 12% to 22%, they'll presumably need physical space - albeit it on shorter term leases. In other words, that old WarbyParker/Bonobos narrative. Also, co-working, AR/VR and, abstractly, experiential retail. 

But, wait, what about 2018? It appears that - despite quarter after quarter of assurances from the A mall types that bankruptcies lead to released space at higher rents - a tipping point can be reached. The company notes, 

• "I’m cautiously optimistic about 2018 for all the reasons that we've talked about today. Look if this was late I would say we're in choppy waters from an incident that happened in 2017, which was a tremendous amount of store closures. It takes six to 24 months to intelligently re-curate and re-merchandise these spaces and great centers like we know. And I'm cautiously optimistic so we'll see."

Yes. We will. In the meantime, this healthy "A" mall is cutting overhead and making headcount reductions. Cautious, for sure.