Credit Suisse Upgrades Macerich After Simon Offer Is Rebuffed

Credit Suisse on April 1 issued a research note updating its views on Macerich Co MAC, after the company formerly rejected Simon Property Group Inc SPG's $95.50 per share purchase offer.

The Simon offer was 50/50 cash and Simon Property shares, which Credit Suisse estimated was equivalent to a 4.2 percent cap rate based upon how it values Macerich assets.

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The Vanguard REIT Index ETF VNQ is a good proxy for the entire REIT sector.

After the "noise" of the failed M&A attempt is filtered out, second-largest mall landlord, General Growth Properties Inc GGP, has been the top performer for the past 12 months.

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The top three mall REITs have all outperformed the VNQ during the past year.

Macerich: Raised From Underperform To Neutral, $78 PT

• The price target represents a small downside from the April 1, $79.27 closing price for Macerich shares.
• Credit Suisse believes Macerich is now essentially "fairly priced" as an ongoing concern.
• The Credit Suisse price target "is based upon a 75% weighting of [its] $76/sh forward NAV (5% premium to NAV to reflect management and asset quality); and a 25% weighting of [its] $74/sh DCF estimate."

While the firm continues to view Macerich "as a high quality mall portfolio with significant development upside," it believes that upside is already reflected in its $78 PT.

Simon: Outperform Rating, $226 PT

• The price target represents a potential 14 percent upside from the April 1 closing price of $197.99.
• The Credit Suisse price target "is based upon a 75% weighting of [its] $206/sh forward NAV (plus a 10% premium to reflect management, asset, and balance sheet quality); and a 25% weighting of [its] $230/sh DCF estimate."

Credit Suisse - Mall REIT Price Target Risks

• Retail tenant demand slows, due to modest retail sales growth.
• Risk of share loss from brick and mortar retail to internet retailers/e-commerce.
• Shift in investor sentiment over potential impacts of e-commerce sales.
• Increased supply of retail space in key markets.
• Rising interest rates negatively impacting "cap rates (i.e. asset pricing) as well as financing costs (i.e. higher interest expense / lower FFO)."
• Risk of development yield compression reducing accretion from redevelopment projects.

Bottom Line

Notably, Credit Suisse was surprised that Macerich did not even attempt to sit down and hammer out an acceptable deal from Simon.

Macerich management intends to increase shareholder value "through operating margin improvement and development execution/accretion over the coming years."

Credit Suisse feels that Macerich will be under considerable pressure to prove to investors that this strategy is superior to the $95.50 per share offer they rejected, "especially if cap rates rise and/or REIT multiples contract."