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The unprecedented turn of events in the global financial space has frozen credit markets, jeopardizing global economic growth. This, coupled with a rapidly deteriorating retail climate and declining commercial real estate valuations, has severely damaged the fundamentals of real estate investment trusts (REITs) with significant amounts of debt maturities in the near-to-medium term. Macerich (MAC), which has nearly $4 bn of debt due over the next three years faces a daunting task ahead to navigate as a going concern. Further compounding the problems for MAC is the Company’s property portfolio, which is highly susceptible to the current crisis, built on high leverage (current LTV of 85% based on market value) and including a significant number of underwater properties with negative equity. As expectations of a recession are fast turning into a reality, a slowdown in consumer spending and a consequent impact on retailers would result in additional pressure on the Company’s occupancy levels, impacting its rental rate growth and net operating income.  As we navigate through future, the problems in the financial sector are expected to get worse before they stabilize wherein our expectations of the Distressed scenario (of the four scenarios explained in the report) could well turn into a reality.

REITs are very labor and intellectual capital intensive companies to value properly. General Growth Properties and Macerich consumed an enormous number of man (and woman!) hours and required extensice modeling, macro research and fact gathering. Thus, this particular professional report is 37 pages long, nearly twice the normarl report size, and this is after releasing over 100 pages of preliminary findings! The effort is well worth it, though, for it illustrates the anwer to the quesion: Is Macerich an undervalued victim of a bear market slaughter, or is it a bankruptcy waiting to happen?

The work that went into this...

We have arrived at MAC’s valuation by valuing each of MAC’s 103 properties (including that of consolidated and unconsolidated JVs) after consideration of their expected rental income and debt repayment obligations. Each individual property valuation assumes rental income based on the current prevailing market rentals for similar properties in the same location (zip codes) sourced through prominent info sources and brokers including Loopnet and CB Richard Ellis. The rental stream for each property has been projected for the next 20 years based on macro-economic factors like expected population and household growths at each of the subject property location. In addition, the valuation takes into account the total gross leasable area and rentable area, occupancy rates, property management expenses including insurance and taxes, renovation and maintenance capex, mortgage outstanding, and refinancing requirements.

The above methodology has been followed under four different scenarios - Refinancing scenario, Asset Sale scenario, Foreclosure scenario and Distressed scenario. We have arrived at MAC’s valuation based on weighted average (probability of likelihood being weights used) of valuations arrived at under each of these scenarios.

   A sizeable portion of MAC’s portfolio was acquired over the last 5 years, during the period when property prices were on an upswing. As of September 30, 2008, MAC had an ownership interest in 103 regional shopping centers and community shopping centers, primarily concentrated in the western US, with 80.7 mn square feet of gross leasable area. Of these properties, nearly 32% were acquired between 2002 and 2004, and 25% were acquired after 2004. With nearly 57% of the properties acquired in or after 2002, when the commercial real estate prices were witnessing a steep rise, a sizeable portion of MAC’s properties currently have a market value lower than the book value (purchase cost net of depreciation) and have a loan-to-value greater than 100%, representing negative equity.

  Subscribers may download the full reports here:

icon Macerich Forensic Valuation - Retail (264.45 kB 2008-11-28 14:49:36) 

icon Macerich Sensitivity Analyis - Pro (298.73 kB 2008-11-20 12:02:08)