How Macerich dodged default on its Santa Monica mall

Rate caps, extensions help property owner survive to find new tenants

Macerich's Tom O’Hern and 395 Santa Monica Place (Macerich, Google Maps)
Macerich's Tom O’Hern and 395 Santa Monica Place (Macerich, Google Maps)

Macerich, the third-largest mall owner in the country, has found a way out of the crisis facing retail property owners as their loans come due for refinancing with much higher interest rates.

The Santa Monica-based real estate investment trust had about $300 million coming due on its flagship Santa Monica Place mall in December. Macerich hadn’t paid down any of the balance and had two large vacancies at the 527,000-square-foot trophy shopping center. Bloomingdale’s and ArcLight Cinemas both vacated their premises at the mall during the pandemic.

Days before the loan was due, Macerich worked with its lender, Wells Fargo, to extend the loan and buy a rate cap, according to financial filings, protecting itself from default for three more years and giving it time to solve the vacancy issue. 

Interest rate hikes have led lenders to be more conservative and delinquency rates on loans backed by commercial properties have ticked up. Brookfield, Pimco and Starwood Property Trust, among others, have defaulted on commercial-backed loans in recent weeks. 

But Macerich’s extension marks a rare example in recent months of borrowers and lenders working together to stave off default and distress. 

Santa Monica trophy

Macerich has been working to reduce its debt and extend out its maturities since 2020, when it reported a $245 million net loss at the end of the year due to pandemic-related closures and a drop in revenues, according to filings with the Securities & Exchange Commission. 

The REIT bought Santa Monica Place for $130 million in October 1999, according to a press release at the time. The firm used an $80 million mortgage from Morgan Stanley for the acquisition, loan documents filed with L.A. County show.

About 305,000 square feet of the property is available to be leased, according to Macerich.

In 2017, Macerich scored the $300 million loan from Wells Fargo on the property, replacing a roughly $220 million loan. By then, it had signed Bloomingdale’s and Nordstrom — two higher-end department stores — as tenants. 

The property was 95 percent leased at the end of 2019, a metric of success for a mall in the era of online shopping growth. The same year, it was paying 3.34 percent on its loan, coming out to about $767,000 a month. 

Macerich was reeling in an average of $58 per square foot a year on its owned malls, it disclosed in a 2019 report. Based on that average, the 95 percent-leased Santa Monica Place would have generated about $1.4 million a month in rent — almost double what was needed to service the debt. 

But then the pandemic hit, causing some tenants to leave. At the end of 2020, occupancy dropped to 90.6 percent, bringing monthly income slightly down to about $1.35 million, based on average rents Macerich charged in 2020. 

By 2021, things were looking more grim for the Santa Monica mall. Bloomingdale’s and ArcLight Cinemas had both left, bringing occupancy down to 85 percent. Macerich reserved about 100,000 square feet at the mall for redevelopment, with the hope it could attract new tenants. 

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Given the occupancy dip and the space taken off the market, rental income at the property would likely have dipped to about $1.1 million a month.

Kicking the can

By the middle of 2022, Macerich was hopeful things would improve. 

“We continue to expect gains in occupancy, net operating income and cash flow from operations through the remainder of this year and into next year,” Macerich CEO Thomas O’Hern said on an earnings call in July. 

But occupancy at Santa Monica stuck at 85 percent through the end of the year. And its loan was coming due. 

In August, the loan was sent to special servicing, according to commentary from Trepp, as it faced “imminent monetary default.”

Its debt service had soared from July to December, given it had a floating interest rate linked to Libor. Macerich was paying 6.19 percent interest on the loan in December, coming out to $1.4 million a month.

To cover the debt payments, the company needed to address both income and expenses. First, it needed new tenants. Second, it needed a rate cap to protect against further rate increases. 

Macerich asked for a three-year extension, according to Trepp — more time to find tenants to replace Bloomingdale’s and ArcLight Cinemas, plus fill a vacant restaurant space. 

It also purchased a rate cap for $2.84 million, Trepp said, which puts the interest rate ceiling on the loan at 4 percent, SEC filings show. 

Many commercial real estate firms have turned to rate caps to cool the cost impacts of rate rises. However, the cost of these caps grew more than tenfold over the course of 2022. Macerich was one of the firms willing to pay. 

The REIT enticed Wells Fargo with more — it said it was in negotiations to fill the spaces left empty by Bloomingdale’s, ArcLight Cinemas and the vacant restaurant, Trepp said, citing data from the special servicer. It agreed to put $22 million in equity into the loan, which would be used to re-tenant both spaces.

Wells Fargo approved terms for two potential leases at the property — neither of which have been announced publicly or signed yet. 

And Macerich followed through — in part. In January, the firm announced art exhibition space Arte Museum had signed a 48,000-square-foot lease to occupy part of the ArcLight space. This week, Macerich said Taiwanese chain Din Tai Fung was moving into the roughly 10,000-square-foot restaurant space at the mall. 

“You’ll be seeing announcements for the next few weeks,” Macerich CEO O’Hern said on an earnings call last month. “We’re seeing a heightened sense of urgency to get deals done and documented.”