We have recently downgraded The Macerich Co. (MAC), a real estate investment trust (REIT) focused on leasing regional and community shopping centers throughout the U.S., to Underperform from Neutral rating as we anticipate it to perform well below the broader market.
The prolonged recession has taken its toll on Macerich and has led to increased tenant bankruptcies, which in turn have resulted in a decline in occupancy and an increase in vacancy rates. Consequently, the top-line of the company was adversely affected during the last reported quarter. Macerich reported revenues of $182.1 million during first quarter 2010, compared to $210.8 million in the year-ago quarter.
We are also skeptical about the overall retail industry, as the fortunes of retail landlords are largely driven by consumer spending. With the reduction in disposable income and lower consumer discretionary spending due to challenging macroeconomic environment, the company is under severe stress to maintain profitability. Accordingly, Macerich has resorted to equity financing to increase its liquidity. Although the move has provided the company with much-needed cash, it has resulted in earnings dilution in the short-term.
Furthermore, Macerich has an active development pipeline, which increases operational risks in the current credit-constrained market, exposing it to rising construction costs, entitlement delays, and lease-up risk. However, Macerich is one of the largest operators of regional and community shopping centers in the U.S. with assets in high barrier-to-entry markets, which has enabled it to hold rents fairly stable. If the company can tide over the current storm, it can expect a reversal of fortunes.
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