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Macerich: 6 Reasons Why I Have Become Less Optimistic

Jun. 05, 2020 4:11 PM ETThe Macerich Company (MAC)127 Comments
Roberts Berzins, CFA profile picture
Roberts Berzins, CFA


  • Two months ago I wrote about MAC arguing that it has sufficient liquidity reserves to withstand the crisis for at least a year while keeping the recently reduced dividend.
  • Now I still consider MAC an attractive long-term investment, but my level of bullishness has gone down.
  • If you factor in the extreme leverage, reduced CapEx right when it is needed the most and the hardships in divesting non-core assets, MAC can really go either way.
  • Add the facts about struggling tenants, reasonable probability of facing second wave of virus and the accelerated secular changes, the future outlook does not look rosy at all.
  • The reason why I am not recommending to short MAC is the proven track record in handling the GFC and the top-tier asset quality trading at steep discount to NAV.

There is no doubt that Macerich (NYSE:MAC) is one of the most popular REITs among retail investors and, especially, in the Seeking Alpha platform.

The sky-high dividend yield (before COVID-19) in combination with a portfolio packed with widely known trophy properties have been the main elements of attraction. The most recent performance of MAC's share price has potentially evoked a more intense interest in the Company.

Source: YCharts

Two months ago I wrote an article about MAC "Testing The Solvency Risk Of Macerich" in which I argued that MAC has enough liquidity to survive ca. 2 years without suspending the common dividend. Broadly speaking, I was bullish and thought that MAC was a sound bet for a long-term investor.

Since then, we have had access to a myriad of Q1 earnings and hard data on the direct consequences from the virus. In addition, we are gradually recognizing the long-term negative effects caused by the virus (e.g., secular changes).

So, by factoring in the recent data and the future prospects of retail, my level of bullishness towards MAC has decreased. I still consider MAC a good bet for a long-term investor, who has the stomach to withstand gigantic share price swings. However, the size of position has to be seriously reconsidered so that it constitutes only a tiny portion in the overall portfolio.

Below I will try to encapsulate six things (in no particular order) about MAC which make me worried. Put differently, these aspects should be thoroughly assessed and taken into account before going long on MAC.

1 - Extreme leverage

I know that it really does not make too much sense looking at the book values for REITs, but the fact that MAC has one of the highest debt ratios not only in the retail sector but across the whole

This article was written by

Roberts Berzins, CFA profile picture

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (127)

Robert Lewis profile picture
Based on the thin equity capitalization of mall Reits, I would rather own MAC common than PEI or WPG preferred. I believe most of the Reits will lose (or surrender to lenders) some of their properties but there will still be room for recovery.
Roberts Berzins, CFA profile picture
@Robert Lewis Yep! Soon I will publish an article in which I've estimate two "default" scenarios of MAC. In one scenario MAC would have to default on all of its non-recourse loans, and in the other it would have to hand back Group 4 & 5 malls (lower quality) to the lenders.
The initial results indicate steep discounts to NAV. Put differently, in both of the scenarios, the investors benefit.
Robert Lewis profile picture
When i leave the Kollel, I usually walk down Madison from 96th to 42nd. I see that only 80% of the stores will be re-opening and that is Madison Avenue. Many retailers such as The Gap or Victoria's Secret must close many stores if they are to survive. I cannot see Macy's surviving in its existing configuration.
I wonder what this guy's opinion will be next week, when his hormones change again?
Sundance Utah profile picture
What am I missing here? Stock price went from $89 July of 2016 to $26 pre-covid. In what universe is this a good REIT? Yeah, you get the dividend, but you also get share price wipe out. Stock is trending DOWN. it may go back partially up to pre-covid, but from there is still looks like it is sinking.
@Sundance Utah That's a brilliant detailed analysis. You should be a writer for Seeking Alpha.
Sundance Utah profile picture
Sarcasm? It was just a question. You couldn't answer, just a snide swipe eh? Did you buy MAC 2016, 2017 or 2018? If so, how is your investment doing? pretty shitty? You must be loving the dividend.
Scarlo profile picture
Sundance, the ups & downs make the market. If you try driving while looking in the rearview mirror you may miss something good.

What some of us expect is that the recent price of ~$6 was a good entry point. I know I doubled down around that price.

We'll see how the chips fall. It may be a rough ride to the finish line.
georgefelix75 profile picture
Does anyone think that SPG bailing on the Taubman deal that they might be interested in MAC instead?
ca7711 profile picture
False hope i think at this point. Need to stabilized customer demand for malls before SPG would feel comfortable putting money toward a purchase. We shall see though. Maybe SPG is able to pull TCO and MAC under its wing over the next year to be THE high quality mall REIT. I would imagine their neg power with retailers under such a scenario would become exceptional.
And so would their dependency.
The case is still in court and it is not certain that SPG can get out. Until the issue is resolved, it is obvious that SPG won't be negotiating with MAC.
AssetMonk profile picture
Geee.... look at the number of comments this article raked up, surely MAC is like new Tesla, can't go wrong with these passionate popular stocks. 36% of total float is shorted, this rocket got proper payload. In 1 week it jumped up 80%
AssetMonk profile picture
1- Let MAC go for chapter 11, I am happy to pick more below 5, Asset values and quality are better than other equities facing bankruptcy risk.
2- Now is not the right time to spend Capex, everyone else is cutting Capex. Pausing it is most sensible thing. So not an issue.
3- Let the dust settle in 1 years time or by the time ash reserves dry up asset prices will be back.
4-Just like any other landlord, holding on to performing tenant is better than empty space in the mall, Happy to forego rent, dividend for entire 2020 for survival
5- Medical Professionals, Authorities, Consumers and everyone is wiser and smarter than they were in March. 2nd wave is here already, no one cares about it more than George Floyd at the moment. Second wave will have lesser impact on economy than first one. Media moved on to election cycle.
6- A grade malls have longer life expectancy and better positioned to handle secular headwinds than other malls. A grade Malls have more evolution options compared to peers.
08 Jun. 2020
What if there comes another totally different virus tomorrow? Will people go shopping? Just kidding.
georgefelix75 profile picture
@qiphy Take the virus off the table and consider if unemployment was the only factor what the stock is worth and what are the prospects under that scenario. Retail was already in trouble before so add in the lack of consumer capital and decided if that is sustainable given the hit taken by Covid. Covid is mostly over in most peoples minds so that should not be part of the equation.....
09 Jun. 2020
Completely agreed. I was just telling that there could be another huge risk for long-termers. Global warming will surprise us in many horrible ways in the years coming. Due to the environmental change, more deadly viruses transporting to human society is inevitable IMO. The frequency of something like COVID-19 will only increase. Of course, this is very pessimistic, but personally I like to be prepared as an investor.
@qiphy so how are you preparing? in all Cash? T-bills? Gold? Any stocks?
ShaiBerkovitz profile picture
Not to mention that it is trading at a discount to equity
ShaiBerkovitz profile picture
I can see this 18$ next week, new york is entering phase 1 of reopening the economy, malls should surge
InvisibleOne profile picture
Everything will be O.K.! :)
Robert Lewis profile picture
If MAC cannot make it, then PEI, WPG and CBL have no chance at all
ptrem profile picture
06 Jun. 2020
I think they should take the opportunity to buy a competitor. Regency cimes to mind.
Scarlo profile picture
@ptrem Completing a buyout with cash will be very difficult because they are already levered to the hilt & are in cash conservation mode. Buying anyone out using their equity will likely be dilutive to shareholders because their shares are trading near distressed levels. MAC is an Class-A mall operator and regency is mostly open air strip centers - both are retail but somewhat different strategies.
mysonchino profile picture
Up 20% yesterday after up previously throughout the week. There is value here in some way shape or form. The stock has to have a $35 value at some point.
This is a thoughtful reasoned article, unfortunately this market is neither.
@robertsberzins -
Do you happen to know, offhand, what percentage of their malls are outdoors vs indoors?
Thanks again for your cogent analysis- much appreciated!
Roberts Berzins, CFA profile picture
@JackCr unfortunately, I don't have the exact number at hand, but the % of all properties attributable to indoor is about 75%.
But the key here would be to focus on the % of revenues generated by indoors vs outdoors.
Anyways, this is a nice perspective to assess. Let's see, I'll try to take a stab at this next week. Will revert back to you when I've smth.
Indoor vs. outdoor?!? Are you people crazy? MAC will hit 30 one day and then hit 60 another day.
Indoor vs Outdoor will be meaningless in one year, Covid will be GONE.
You students get an "F"
Nice article, but I believe the bankruptcy risk at this point in time is fairly low. They own destination and top tier malls, which are much better suited for long term survival. And their debt load isn't different from other mall reits, with the exception of SPG. So until we see other mall reits with inferior properties and similar/worse debt loads start to go under, MAC is not at risk. And if other mall reits start to do under, one can make a pretty good argument that MAC will benefit greatly from the consolidation.

I don't currently own MAC, but was seriously considering it for the past 2 weeks.

It looks like CBL will file for bankruptcy shortly. They missed an interest payment. So they'll be the first mall REIT to go under, as expected. Next will be PEI or WPG. I expect equity holders (common and preferred) in all three companies to lose their entire investments.

MAC may or may not survive. But if they survive only by returning many properties to lenders and not paying a meaningful (cash) dividend for many years, they won't be a great investment.

Most mall REIT investors at this point are buying a "story", that we'll always need some malls, and their malls are better than the other guy's malls, so they'll be the last ones standing. Sort of like how everyone believes that he or she is of above average intelligence.

I strongly suggest reading the earnings call transcripts of leading mall tenants like GPS, JCP, M, and others, to see what they're saying. It isn't good. There's a reason why they're refusing to pay rent not only for April, or May, but for June and beyond as well.
@HPBunker Seems to me that the bears are buying a "story" that people don't like in-person shopping anymore. I find that laughable.
Scarlo profile picture
Agree with @onepawnleft I also feel strongly that malls aren't going away completely. Just consolidating towards strength. Simon knows.
05 Jun. 2020
I was locked 2 months and did not buy anything which was not basic need.

Now, for one week everything is open, and I spent 2k for clothing, in a mall of course, which by the way was crowded and full of people as before.

One lesson from covid is that online shopping is more than naked without brick and mortal. Companies aiming to be 'the people's marketplace' for some time now see a need for physical product presentation, but things may now become stategic ...

"Now, for one week everything is open, and I spent 2k for clothing, in a mall of course, which by the way was crowded and full of people as before."

And this is why AEO is reporting only a 5% sales decline versus 2019 at reopened stores. But that's pent up demand. It's like what happened to auto sales during the "cash for clunkers" stimulus program.

Are you going to spend another $2,000 on clothing next week? If after a month and a half of deferring purchases, and half of mall stores still being closed (should mean more sales for the stores that are open), the best mall stores can manage is almost reaching 2019 sales (most retailers did far worse than AEO; M reported only 50% of 2019 sales at reopened stores), these retailers are in serious trouble.

A lot of those sales have shifted online, which of course benefits MAC, SPG, etc. not at all. We don't need all these stores. Think about how MAC's FFO will look with 80-85% occupancy, and half the remaining tenants withholding their rent payments.
@HPBunker Sorry chumley but you missed the bottom. It's probably killing you now you can't pull the trigger now that it's rising, lol.

Do you feel like these companies, who still generate 80+% of their sales in-store, will jeapordize their relationship with SPG / TCO / MAC by not paying rent or not catching up on delinquent rent?

The anchors are failing for a reason. Their business model is dying in an age with short attention spans, easy product access, and online delivery.

If they (retailers) lose their stores in the best retail districts in the entire nation (and world) consider them extinct in the next 10 years.

What they save in rent / overhead would largely be offset by increased marketing cost and a drastic decrease in sales.

I'd rather be the landlord than the retailer. Customers don't have an obligation to buy your product. Tenants have a contractual obligation to pay you rent. A contract by which if you don't pay rent, or you stiff the landlord, good look renegotiating your leases in ALL your stores across the country.

These "malls" are the best marketing tools in the entire world and they have the outdated tenants by the balls.

Think of the forest through the trees.

heard the looters even struck at the scottsdale az mall. that is an absolutely stunning piece of real estate. long mac avg at 15.85. glta longs
My cost basis is around $7. I’m OK if it runs to $15 or anywhere near there. I think it will go to $20 before year end. At some point there will be another buyout offer. Replacement cost is just so much higher and the assets are irreplaceable. To me this seems like a really easy one.
Tuco's Child profile picture
I hold MAC.

Was thinking maybe get out the D9 CATS, demo and scrape the duds, build apartments.

Or call Mr. Simon and beg for a second chance.

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