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THE MACERICH MATRIX

Change is the only constant for the fast-growing REIT, executives say

By Debra Hazel

The Macerich Co. has been at the forefront of the retail real estate industry’s recent wave of consolidation, purchasing Phoenix-based Westcor Partners for $1.5 billion in 2002 and Rochester, N.Y.-based Wilmorite for $2.3 billion in 2004. In just a few years, the Santa Monica, Calif.-based REIT has grown from a West Coast concern specializing in mall redevelopment to a national power figure with 80 properties and projects ranging from retail developments and redevelopments to entire master-planned communities. A nonstop learning process helped Macerich ride the wave successfully, says President and CEO Arthur M. Coppola. He and COO David J. Contis, CLS, CSM, discussed the company’s continuing evolution with SCT in March.

SCT: What lessons learned from the Westcor acquisition applied to your purchase of Wilmorite?

Coppola: Prior to Westcor, we had bought packages of properties, but they were really asset acquisitions. Westcor was a quantum leap in terms of size. To finance it we needed to put together a billion dollar line of credit. We had never done anything like that before. We put together a bank syndicate, roughly 25 banks led by Deutsche Bank and JPMorgan, and we were able to look Westcor in the eyes and say, “We’re prepared to write a check for $1 billion.” Suddenly, we had developed from a balance-sheet viewpoint the capacity to do an extremely large deal. Within a year we paid off all the debt through an equity financing.

In 2004 we knew [Wilmorite] was going to be expensive, $2.3 billion, with very little debt at the property level. We needed to raise about $1.5 billion to close that transaction. The bank group we had put together to do the Westcor deal was very happy with our results. So we put together a much larger bridge facility, which we paid off in January, and brought about 45 banks into it.

Westcor provided us the first opportunity to do a $1.5 billion transaction on our own, and we were able to raise that capital quickly through our banks. With that experience, we were confident we could handle a $2.3 billion transaction at Wilmorite and that it would be well received. And it was.

On the integration side, Westcor was extremely unique: Not only were we inheriting and buying assets and on-site people, we were getting a tremendous number of corporate home office people, and it was key to Westcor’s founders that they be integrated and taken care of.

Contis: Wilmorite and Westcor were very different transactions. The good news is that we did some things exactly the same. We identified integration managers for Westcor, Wilmorite and Macerich well before we closed the deals. One person on each side was responsible for making sure that all the things that had to get done to close and to integrate would happen. Most companies don’t do that. We started the integration the minute we knew we were going to do the deal. That didn’t change.

The next thing was the sister mall program, where we took one mall at Westcor and lined it up with a mall at Macerich so [staff] had people to talk to who weren’t necessarily their boss. They could ask questions without feeling bad. We did that with both deals.

[Also] we asked people what they thought their company excelled at and what they needed help on. Westcor was very good in development and leasing and really good at marketing. We helped them with back-office, the finance side and with buying efficiencies. Wilmorite was phenomenally good at leasing but needed help with management and marketing. They benefited dramatically from us.

In both cases, we [also] told them to focus on the revenue side of the acquisition, not just the expense side. You can cut expenses one time, or lay people off. We told them, “We’re talent hunters.” Not only were we buying great properties, we wanted great people. We wanted them to tell us which people we should have.

With Wilmorite we learned how to listen. We were actually going to put the Wilmorite offices in Washington, D.C. But the Wilmorite executives convinced me that we could hire better people and work more efficiently in Rochester, N.Y. That not only empowered the people at Wilmorite, they saw we really do listen.

I’m not sure we have a unified culture, nor do we care to. There is an overriding theme of who Macerich is, but at the property level the culture should be the culture of the community and the customer and serving them. At Westcor we did something unheard of: We kept their name. It had such a strong brand, and it was an important unifying event for them. At Wilmorite there was not the same unanimity behind that brand for them, and the properties were far more dispersed. But the work ethic was phenomenal, and we didn’t want to lose that.

We lease differently in Phoenix than we do in other areas. We’ve learned from Westcor and Wilmorite that maybe having a bifurcated leasing system is better for us, so we have regional and on-site leasing people. We’ve created a different system for our large-format retailers, restaurants and luxury brands. Those tenants have distinct needs, and we need to serve them differently. We serve them by portfolio or by national account, as opposed to the Gap-type tenants, which are done regionally. We’re the only company that has that hybrid system.

SCT: What lessons can other companies learn from Macerich’s experiences?

Contis: One is that the integration starts well in advance of the closing. The acquiring company needs to be humble and respectful. The acquiree needs to be confident and voice their opinion. The integration doesn’t end until several years after the acquisition.

Coppola: Another is the body language and the words you use. [With] Westcor and Wilmorite, we didn’t say, “We’re buying your company” or “We’re acquiring your company.” We just immediately leaped forward to using words like, “Now that we’re going to be together, it’s time to integrate.” It’s not a domineering approach. The other thing is going in with open eyes and taking the attitude that we want to learn from you what you do best and what you do better than what we historically have done.

It’s intimidating for any operating company to see ownership change. It’s important to treat the people involved with a great deal of respect. Had David and the entire integration team not taken that attitude, we could have ended up losing some extremely talented people. The real disaster would have been to think of it as an asset acquisition and lose that talent.

The minute that Westcor went on the auction block, we reached out to the most senior people to assure them that it would be an integration, not an acquisition.

To a lesser extent, we did the same thing at Wilmorite. We didn’t know as many people, but we let them know that if we were the successful bidder, we would view them as coming on board with our team and that we valued them highly. We didn’t just view it as adding a building block to our empire.

The Wilmorite closing, for example, was a five-month process. If we had not been at their offices every day with operating people, not [just] lawyers and accountants, we would have lost talent. And the operating results at Wilmorite would have drifted.

Westcor was obviously the largest transaction we had ever done. When we bought Westcor, we put some stress on our balance sheet. We took our leverage levels to a higher level than normal. We took our levels from roughly 50 percent leverage to around 62 percent.

When you take on that many properties and an organization with two developments coming out of the ground, Westcor’s La Encantada in Tucson and Scottsdale 101, the analysts deservedly had some skepticism about how well we would integrate the companies. Our competitors were skeptical we would generate the returns on our investment we indicated for our first year.

But we exceeded our first-year estimates in terms of revenue performance. Within a year of buying Westcor, we brought our debt levels back down to normal. We basically executed on every point. Wilmorite, again, was a large transaction. We put stress on our balance sheet, borrowing roughly $1.2 billion from our bank group. Again, there was some skepticism, but a lot less.

If we had not had that experience and track record, there clearly could have been skepticism as to whether we could have executed on the expansion of Tysons Corner, the crown jewel of Wilmorite, given that steel was coming out of the ground and no leases were signed in December 2004, and our targeted opening date was November 2005.

But there were very few questions from the analytical community about the debt we had taken on or integrating the companies or executing that expansion. We opened our expansion of Tysons Corner 30 days [early] and 97 percent leased. Instead of seeing an 11 percent return on investment, we had 12 percent.

In any environment, whether it be shopping centers, Federated-May Co., or any large acquisition, more normally than not there are probably misses in estimates by the acquiring company on earnings per share results. We do something very unusual, because very few people in our business tell Wall Street in advance the anticipated return on an acquisition in the first year of ownership. There’s a lot of risk in that. We have an extremely sophisticated financial system and people who are extremely talented at forecasting. And we have a track record of being able to integrate. Once again, we’ve outperformed at Wilmorite already.

SCT: You’ve also reorganized departments?

Contis: We’re never willing to concede that we’re running efficiently. We’re constantly re-evaluating, because the way we [did] business six months ago doesn’t necessarily mean that’s the way to do business next year or today.

When we were smaller, we had fewer people, so they had to be generalists. But because of our development pipeline and our opportunities, we couldn’t just have everyone to do all things for all people anymore. So we bifurcated the marketing department into two sections.

Some of the lessons we learned from Wilmorite and Westcor is that we need and we will continue to have regionalized offices to do our leasing, but we also will supplement them with experts in fine dining, casual dining and large format tenants.

We are no longer in the business of leasing empty space. We have great real estate, and our job is not to fill empty space but to continually solicit our retailers and ask them if they want to be at our properties. If there is that demand, and in most cases there is, it’s our job to create the supply for it. It’s a very focused program, and our leasing and marketing are driven by that.

We’re in the business of understanding the demand from our retailers to fulfill the demand from consumers. It’s our job to create that supply, whether that’s renovating a center or expanding it or recapturing department store space and reutilizing it.

Coppola: Unique to Macerich is that at least every 18 months our organization chart completely changes. We identify people who are talented at certain things; then we organize the company to let them do what they do best. When we established Lumenati, we took the people who understood the luxury retailers’ needs from leasing, management and marketing perspectives. Recently, we decided we had some people in the organization who had a unique talent in identifying fine restaurants, something a lot of regional shopping center companies are adding to their properties. We took those people and created a department. David didn’t create a department and then look for the talent.

If our organization chart looked today the way it looked pre-Westcor, a whole bunch of talent wouldn’t be here today. What we do best is provide an environment for talented people to succeed. If that means you have to reorganize your company to do it, that’s what you’re going to do. We clearly have an organization chart today that is driven by the skills of the people, not by some demagogue drawing boxes on a piece of paper and moving people around.

Contis: We don’t even call it an organization chart — it’s our operating chart. It constantly morphs, based on who’s talented at something. When that happens, it maximizes shareholder value. [Our] network matrix constantly morphs based on people and their talent. And it never ends.

SCT: What other other branding initiatives are under way at Macerich?

Coppola: We like each of our shopping centers to have a unique identity and be part of that community. We don’t put the Macerich name on top of the buildings that we own. We want the community to own that shopping center. As part of the acquisition and integration and merger with Westcor, we became aware that their name brand recognition in the Arizona marketplace was unheard of. So we decided to maintain that brand and that name.

Our portfolio has a mix of assets. We identified roughly eight assets that were marketing to the luxury retailer and decided to brand those assets in the group that we call Lumenati to service the luxury retailer and give it an image and a brand.

Contis: The Lumenati initiative, which was developed by many of the Westcor people, today is not much of a consumer brand. It may evolve someday to it. It is really a business-to-business brand. Think of it as a private bank for luxury retailers. The real thought behind it was how to best serve our clients, the retailers. The luxury brands that are only going to open eight stores in a year aren’t going to talk to seven regionals. They have different needs and different expectations in terms of service.

The third brand extension is Phoenix 20/20, in which we are telling Arizona that we are proponents of intelligent, well-thought-out growth. The name comes from our vision of what we think retail will look like in 2020.

Macerich is the overall brand, but Macerich may not be relevant to certain functions. Our name is only important to us when it sends the right message. That’s why we’ve looked at some of these separate and distinct brands.

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