By Joy Wiltermath
The Federal Reserve's long-term high interest rates have hurt mall owners with maturing debt.
Shopping mall giant Macerich is facing further defaults on maturing shopping mall loans, according to Barclays.
Commercial property owners, reeling from falling building prices and the end of an era of low interest rates, are scrambling to sell assets to raise cash and return unwanted properties to lenders.
The process appears to be intensifying as property owners are more willing to offload troubled assets after the Federal Reserve signaled that significant interest rate cuts this year are unlikely.
As a result, Jackson Shay, who became president and CEO of Macerich (MAC) in March, detailed the company's multiyear “strategic plan” during the company's first-quarter earnings call on Tuesday. Shay said the plan includes deleveraging, pursuing property sales and “potentially returning” some properties to lenders.
“These changes are likely to cause pain to the company's lenders, but they are probably too late,” Barclays analyst Lee Overby's securitized products research team said in a client note on Thursday, noting that there are four to six real estate loans coming due in commercial mortgage-backed debt transactions that could be returned to lenders. “The company posted net losses for the quarter and for the full years 2023 and 2022,” the Barclays team wrote.
Macerich CFO and Treasurer Scott Kingsmore said on an earnings call on Tuesday that the company decided in April to default on its loan for Santa Monica Place, an outdoor neighborhood shopping mall adjacent to the beachside Third Street Promenade shopping area in Santa Monica, Calif. Tenants at the mall include Louis Vuitton (LVMHF), Peloton (PTON), Tesla (TSLA) and Tiffany & Co.
Negotiations with lenders for the property are ongoing, but “challenges in the overall market here in Santa Monica continue,” Kingsmore said on a conference call. “That's impacting our progress and that's impacting our leases,” he said. Santa Monica-based Macerich is one of the largest shopping-center owners in the United States.
Macerich, the Santa Monica Place borrower, is only required to make interest payments since taking out a $300 million floating-rate loan at one-month Libor plus 1.35%, according to CreditQ. The entire debt matures in December 2022 but has been extended for two years.
Meanwhile, the Federal Reserve has raised interest rates at its fastest pace since the 1980s and decided on Wednesday to keep them high to fight inflation.
Borrowers with variable-rate loans and low-interest debt due soon have been hit especially hard by rising borrowing costs.When asked by Wall Street analysts whether the Santa Monica Mall was “no longer worth the investment,” Mr. Kingsmore pointed to its “challenging capital structure.”
Macerich did not immediately respond to a request for comment.The company's shares rose 2.1% on Thursday but are down about 11% so far this year, according to FactSet.
RELATED: Commercial real estate faces a 'slow-moving train wreck.' Here's what lawmakers can do to fix it.
-Joy Wiltermass
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05-02-24 1636ET
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