Last week, Crain's Chicago Business reported that Macerich (MAC -1.30%) had sold its 50% stake in Chicago's high-end Shops at North Bridge mall to its joint venture partner for a pittance. A few days later, the prominent mall owner's annual report confirmed the news. Yet this somewhat surprising development isn't as bad as it might appear for Macerich. Let's take a look.
Here's what happened
As Macerich stated in its 2021 annual report, the mall REIT "assigned its joint venture interest in The Shops at North Bridge in Chicago, Illinois to its partner in the joint venture." Macerich's JV partner (the Alaska Permanent Fund) assumed Macerich's share of the property's mortgage but didn't pay a dime beyond that for the mall itself.
Macerich also sold its 50% stake in an adjacent parcel (once intended for a mall addition) to the Alaska Permanent Fund. It received $21 million for that property, which wasn't mortgaged.
While Macerich received minimal cash proceeds from this pair of transactions, it removed a major liability from its balance sheet. Macerich's share of the mortgage debt amounted to $186 million: 2.6% of the company's total debt as of Sept. 30, 2021. Taking that debt off the balance sheet contributed to the REIT's $1.7 billion of debt reduction during 2021.
Times have changed for flagship retail
The Shops at North Bridge is located in an upscale shopping district in Chicago called the Magnificent Mile. In recent years, the mall consistently ranked among Macerich's top 10 malls in terms of sales productivity. Sales per square foot for small shop tenants surpassed $1,000 in 2019.
The Magnificent Mile is very popular with tourists. For many years, brands were willing to pay sky-high rents not just for the sales potential of locating there, but also for the prestige and brand awareness benefits. In 2016, the average asking rent on Michigan Ave. topped out at $162.41 per square foot. Rents for small ground-floor boutiques fronting the street surpassed $600 per square foot.
Even before the pandemic, brands were rethinking whether it made financial sense to pay such high rents. That led to rising vacancy rates. By the end of 2019, The Shops at North Bridge's occupancy rate had already fallen to 86.3%: down from 98.2% a year earlier and over 99% in 2015 and 2016. The pandemic crushed tourist traffic, leading even more stores to close. Occupancy at The Shops at North Bridge fell below 80% in 2020.
Macerich and the Alaska Permanent Fund refinanced The Shops at North Bridge's mortgage in 2016. That was near the top of the market, when the mall was fully occupied and rents were extremely high. As a result, the mortgage amount reflects a very high valuation for the mall. The subsequent deterioration in demand for retail space there apparently put the owners underwater on the mortgage, and Macerich isn't interested in investing more capital to try to turn things around.
The value of non-recourse mortgages
On the one hand, it's unfortunate that changes to the retail industry landscape and the pandemic have forced Macerich to walk away from one of its top malls.
The Village at Corte Madera is another of Macerich's most productive malls. Image source: Macerich.
On the other hand, this episode highlights the value of Macerich's capital structure. While the mall owner carries a lot of debt, non-recourse mortgages account for roughly 97% of that debt. If a particular mall runs into trouble, Macerich can hand it back to the lender, discharging the related debt and thus limiting the company's downside. In the case of The Shops at North Bridge, Macerich would have faced bigger losses if the property had not been mortgaged.
With a market cap of around $3.3 billion and an enterprise value just above $10 billion, Macerich stock looks like a bargain relative to the value of its assets. As the impact of the pandemic continues to fade, enabling a further recovery in mall traffic, Macerich shares can climb significantly higher.
