Shares of retail real estate Investment trust (“REIT”), The Macerich Company MAC, edged up 0.91% last Friday. The price rise was led not only by the REIT’s better-than-expected earnings results and guidance increase, but also the news of a 50/50 joint venture (JV) between Macerich and retailer Sears Holdings Corp. SHLD for the latter’s nine properties at Macerich Malls.
These properties, valued at $300 million, have been contributed by Sears Holdings. In return, Sears gained 50% stake in the JV and received $150 million. This $150 million was basically contributed by Macerich toward the JV for its 50% stake.
The move comes as a strategic fit for both Sears Holdings and Macerich. Since Sears Holdings’ profitability has been under pressure in recent times, the deal offers it scope to unlock value from its real estate assets and thereby, aid its transformational step toward an asset-light model with lower leverage on physical store locations.
On the other hand, after rejecting Simon’s takeover offer, Macerich has moved ahead. This particular JV offers the company scope to generate value for both its customers and shareholders. This is because, the existing stores would be leased back by the JV to Sears Holdings under a triple-net master lease deal for an expected initial base rent of $14.8 million and a 10-year initial term with two 5-year renewal options.
The JV also enjoys power to re-capture a specific part of the space leased to Sears Holdings and re-lease it at potentially higher rents to other parties. In addition, Macerich’s investment in the JV provides it with an opportunity to create more value through re-development.
Sears Holdings has inked similar deals with Simon Property Group Inc. SPG and General Growth Properties Inc. GGP in the past month to enhance its financial flexibility and unlock value from its real estate holdings (read more: Simon Property Forms a 10-Property JV with Sears Holdings).
Finally, last week, Macerich reported first-quarter 2015 adjusted funds from operations (“FFO”) per share of 86 cents, which beat the Zacks Consensus Estimate of 82 cents. Further, the figure scaled higher than the prior-year quarter tally of 81 cents, reflecting improving mall tenant annual sales as well as same center net operating income (“NOI”). Macerich increased full-year 2015 FFO per share guidance to a range of $3.83–$3.93 from an earlier $3.80–$3.90.
Macerich currently has a Zacks Rank #3 (Hold).
Note: Funds from operations, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
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