Macerich Earnings: Outperforms on Fundamentals but Tenant Sales Per Square Foot Declines

Third-quarter results for Macerich MAC were generally better than we anticipated, leading us to reaffirm our $25 fair value estimate for the no-moat company. Occupancy sequentially improved 80 basis points to 93.4% in the third quarter, well ahead of our estimate of flat growth. Re-leasing spreads were also very strong this quarter with new rent 10.6% higher than prior rent terms, well above our estimate of re-leasing spreads of 5.6% in the quarter. As a result, average base rent increased by 2.8% in the quarter, the largest increase since 2019. Same-store net operating income excluding lease termination income increased 4.8%. Macerich reported diluted funds from operations of $0.42 per share in the third quarter, which was two cents better than our $0.40 estimate.

While we find the company’s outperformance on fundamentals encouraging, there are a few signs that the growth will begin to moderate over the next few quarters. Tenant sales growth in 2021 and 2022 benefited from a return to shopping in person combined with high inflation. Unfortunately, sales growth has slowed in 2023 with Macerich reporting sales per square foot of $847 for the trailing 12 months, which is 3.4% lower than the trailing 12 months ending in the third quarter of 2022. Additionally, tenant occupancy costs have sequentially increased for the fourth straight quarter to 11.4%. We will note that occupancy costs are still well below the 13% levels Macerich’s tenants operated at between 2015 and 2019, so tenant sales should still be healthy enough to cover rent even if sales per square foot continue to decline for a few more quarter. Still, we are keeping an eye on both metrics as they tend to be forward indicators of re-leasing spreads and rent growth.