Move comes amidst a crisis for retail property owners, with loans coming due for refinancing with much higher interest rates
By Dolores Quintana
In a time when interest rates are skyrocketing, the company Macerich has found a way to stave off a financial debacle that could have done great harm to the company as reported by The Real Deal.com. Macerich is one of the largest companies in the United States that owns malls around the country, they are third on the list of the biggest mall companies. A big problem for a lot of the companies in real estate right now is paying the loans on their properties as payment is due with refinancing being less of an option with interest rates being what they are.
Santa Monica-based Macerich owed a $300 million payment in December 2022 and the problems were that the company had not managed to pay down the loan and had two important vacancies at their Santa Monica Place Mall after two businesses closed their operations because of the pandemic. The 527,000-square-foot showplace mall lost Bloomingdale’s and The Arclight Cinemas in the last three years.
How did Macerich solve this problem? In the days before the loan came due, Macerich negotiated with Wells Fargo Bank, their creditor, and came to a solution. The solution was to get a loan extension and purchase a rate cap that would protect the company from default and give them an additional three years in which to pay off the loan and find new businesses to fill the vacancies on the premises.
There have been a lot of defaults because of the current economic climate. Companies like Brookfield, Pimco and Starwood Property Trust have all recently defaulted on their loans and they are not the only ones. Macerich is one of the few companies that have managed to avoid such defaults and has been actively working to reduce the company’s overall debts and push the timing on their current loans as far out as possible. This is a wise decision because the company lost a reported $245 million in net profit in that same year because of the financial crisis caused by the pandemic and the requisite drop in revenue as they reported to the Securities and Exchange Commission.
According to Macerich, a total of 305,000 square feet of retail space is available at The Santa Monica Place Mall. The current loan with Well Fargo Bank was a refinance of the original loan and it seemed like a good bet since Macerich had already secured Bloomingdale’s and Nordstrom as tenants. In fact, the property had a 95% lease rate right before the pandemic hit and Macerich was able to pay 3.34 percent on the loan which is roughly $767,000 a month. The average rental at Santa Monica Place netted Macerich $58 per square foot which meant that the property would have yielded $1.4 million in rentals or double the amount needed to pay the loan.
During the pandemic, the mall lost tenants and by the close of 2020, the lease rate saw a significant drop to 90.6 percent and a monthly income of $1.35 million. The situation deteriorated in 2021 as the pandemic continued and the lease rate dropped further to 85 percent after both Bloomingdale’s and ArcLight Cinemas left. Macerich decided to redevelop about 100,000 square feet of space at the Mall hoping that it might attract more tenants. While it wasn’t a bad idea, it did take more space away from potential tenants and income from the mall dropped even more to $1.1 million per month.
Macerich CEO Thomas O’Hern said, as quoted by The Real Deal.com “We continue to expect gains in occupancy, net operating income and cash flow from operations through the remainder of this year and into next year,” during an earnings call.
However, the occupancy rate did not improve for the rest of the year and Well Fargo realized that the loan potentially go could into default. To make things worse, the interest rate on the loan was a floating interest rate linked to Libor and led to Macerich paying 6.19 percent interest on the loan in December 2021. In real terms, that meant that the payment that month was $1.4 million.
The most pressing issue to address was to purchase a rate cap, which Macerich did and then get a three-year loan extension from Wells Fargo which was granted. The rate cap put a ceiling on the interest on payments at 4% but it wasn’t cheap to buy the rate cap. Macerich’s most pressing vacancies were those where Bloomingdales and Arclight Cinemas had vacated and a restaurant space opening.
While many companies want to buy rate caps and renegotiate loans with their bankers, Macerich was successful because they were able to disclose to Wells Fargo that negotiations were taking place to fill the big vacancies at the mall and the REIT was able to put $22 million of equity in to further secure the loan and help get tenants into the vacant stores.
Wells Fargo approved the renegotiated terms, but none of the specific details of these new loans has been released to the public or signed as yet.
Macerich has had some good news and delivered on some of the promises made during the renegotiation with Wells Fargo. A new tenant, Arte Museum, has signed to fill the vacancy left by Arclight Cinemas and Din Tai Fung, a chain restaurant from Taiwan has been announced as the new restaurant in the vacant food court space.
Macerich CEO O’Hern said, as quoted by The Real Deal.com,“You’ll be seeing announcements for the next few weeks. We’re seeing a heightened sense of urgency to get deals done and documented.” during that same earning call.