Macerich softens downturn thanks to mall transformations.

WALL Street has been kind to REITs this year--that was until many of them missed their earnings estimates this month and saw their shares punished for it.

Macerich Co., though, was an exception.

While the Santa Monica-based mall operator missed analysts' estimates by two cents, its shares retreated by less than a dollar. And they closed Nov. 9 at $77.04, just about three dollars off an all-time high reached in October.

Call it the Federated effect.

While other real estate investment trusts are struggling with a fear that the commercial real estate market may follow the residential market into a downtown--especially after a long bull run--Macerich finds itself particularly well positioned.

The company in August purchased 10 department stores at malls it owned that had become available as a result of the merger between Federated Department Stores Inc. and Robinsons-May Department Stores Co.

That amounted to 2 million square feet of retail at the malls, space that had been occupied by sluggish department stores that now can be transformed into far hipper fare.

"It is great news for Macerich. The department stores are not as strong as they used to be. By buying back that large box they can transform a mall with new restaurants or a lifestyle section or maybe bring in something like a Target," said Jeffrey Spector, analyst for UBS Securities LLC, who rates Macefich a "buy" and has a 12-month price target of $87.

However, there is some caution on Wall Street regarding the REIT, which holds 80 million square feet of property and redevelops, manages and acquires malls.

With company shares only off less than 5 percent from an all-time high of $80.11, five of 11 analysts who cover the company rate it a buy. But there are five holds and one sell, according to Bloomberg News.

Last week, analyst Ross Nussbaum of Bane of America Securities LLC gave Macerich a "neutral" rating, "despite a strong growth profile." That is the result of "consumer sentiment risk" entering the holiday season and "an already-full valuation," according to Nussbaum's research note.

Malls aplenty 

Macerich's strong growth profile is the result of the company's ability to strategically purchase sub-par shopping malls in prime locations and redevelop them into market leaders.

The company has about 75 regional shopping centers and 20 community shopping centers. More than 50 percent of the company's properties are located in Arizona and California.

Its strategy is perhaps best exemplified by its purchase of the Queens Center mall in Queens, N.Y. in 1995. After a $275 million renovation and expansion, the mall has been transformed into a top money-maker for the company, averaging about $800 in sales per square foot.

"The renovation has taken it from a good center to a great center," said Thomas O'Hern, the company's executive vice president and chief financial officer. "It is one of the most productive malls in the country today."

Now, the company is hoping to replicate the strategy with its purchase of the department store properties from Federated. "It's a great opportunity to go in and create value," O' Hem said.

However, the company has not always taken the perfect steps when it comes to redeveloping aging properties. For example, the company proposed plans in 2005 to raze Santa Monica Place, which it purchased in 1999 from The Rouse Co. for $130 million. It was to be replaced with three 21-story condo towers.

But the plan was met with strong community resistance that prompted Macerich to pull back the proposal, despite the fact that it had worked on it with the Santa Monica City Council.

The company has since come up with a simpler renovation that calls for removing the roof from the mall and better integrating it into the popular and adjacent Third Street Promenade. (The mall will be closed by the fourth quarter of 2007 and reopened in 2009 after renovation.)

"It's another destination retail asset," Spector said. "It's a really unique opportunity."

Locally, the company also plans to renovate the Oaks Shopping Center in Thousand Oaks, which it purchased in 2002. The company will begin construction there in late 2007, adding a Nordstrom department store.

The company, though, could face a difficult time in Phoenix, where the superheated residential housing market has cooled, and the company owns 13 regional shopping malls.

Still, the company is continuing to pursue various mall improvements in Phoenix, where some homeowners face the prospect of rising adjustable rate mortgages that will put a crimp on their discretionary spending.

Spector, however, thinks the company is too savvy to force a development that is not appropriate for the market. "They do smart development. There are hidden gems this company has," said Spector, who took a recent tour of Macerich's Phoenix holdings.

A recent financial move also has helped fire up the company's stock this year. In January, the company's stock jumped to almost $74 a share from around $67 a share after a $700 million secondary stock offering. The offering was made to pay down debt the company took on after it bought Wilmorite Properties Inc. in 2005 for $2.33 billion.

"We had leveraged up a little bit when we bought Wilmorite," O'Hern said. "We took the leverage level up higher than it usually is so we raised equity to reduce the leverage level to more normal levels for us."

BY DANIEL MILLER

Staff Reporter

[GRAPHICS OMITTED]

Macerich Co. (NYSE:MAC)

YEAR (Dec. 31)               2005      2004

Revenues (millions)           $767      $547
Total Expenses (millions)      765       509
Operating Income (millions)    2.3      38.3
Net Income (millions)         52.6      82.5
Earnings Per Share           $0.88     $1.40

SUMMARY

Business: REIT specializing in mall renovation
Headqaurters: Santa Monica
CEO: Arthur M. Coppola
Market Cap: $5.55 billion    Dividend Yield: 3.62
Total Liabilities: $5.64 billion  P/E Ratio: 156.75
Long-Term Debt: $3.35 billion