I Am Buying Macerich Properties
Summary
- Management is addressing debt issue.
- Mixed-use facilitates are underrated.
- MAC is discounted due to fear and misperception.
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When it comes to rental property investing my strategy is to purchase undervalued properties that will likely grow in value over time while collecting cash flow from rents. My approach when it comes to real estate in the stock market is very similar. I aim to buy REITs that in my opinion are unfairly discounted for one reason or the other, while collecting cash flow in the form of dividend payments. I also like to add holdings to my portfolio that others may deem “riskier” so I can catch more of the upside as these REITs recover. The Macerich Company (NYSE:MAC) is one such investment.
Snapshot
MAC was founded in 1972 and went public in 1994, nearly 90% of their assets are Class A malls. They own 45 town centers, lease to 172 tenants, own nearly 50 million sq feet of retail space, and have a market capitalization of $12 billion.
In today’s environment, the market strongly dislikes REITs such as MAC due to the retail and shopping nature. Malls are perceived to be suffering a decline caused by overbuilding on one side and the growth of online shopping on the other. While there may be some truth to this argument, what the majority is forgetting is that not all malls are created equal.
Some B, but mostly C and D class malls will suffer due to oversupply and the growth of online shopping but as these properties close, thereby reducing the supply of malls, they drive traffic to the more desirable A class malls, which MAC owns. As seen below, MAC’s growth of sales per square foot and rents has only increased over the last decade.
Many investors also fail the see the transformation that is taking place in the shopping industry. While it is true that malls used to be a pure shopping destination, which is now done more conveniently on the internet through websites such as Amazon (AMZN), today they have adapted and become mixed-use facilities.
Some of these facilities do well because they cannot be migrated to the internet because they are experience based, such as restaurants, bars, movie theaters, and other entertainment venues. Other facilities still have a growing demand for physical locations due to the fact that customers like to physically see the product before purchasing them such as luxury goods and electronics. One may buy an iPhone on the internet and pick it up at the Apple (AAPL) store in order to obtain the product quicker and get help setting it up, myself included. Then there are the retail spaces that provide services that online shopping cannot, such as barber shops, massage studios, and fitness centers.
While it is undeniable that MAC suffered severely during the pandemic, the data shows their recovery is already underway. Occupancy rates hit a low of 88.5% in 2021 and have since grown to over 90%.
While it is true that lockdowns and reduced occupancy rates severely hurt the retail sector, I still believe there is a notable bull case for the higher quality malls because we are social beings that crave social interactions and experiences. We desire to interact with and be accepted by others and to share memories. The pandemic, no matter how severe or scary, does not change hundreds of thousands of years of evolution. Once again, we can turn to the data and extrapolate that as COVID cases decrease, people return to their innate nature of wanting to create experiences.
The biggest bull case for MAC is that they own high quality town centers in the most desirable urban and suburban markets, have shown consistent growth in rents and sales per square foot, and continue to adapt to a changing retail environment by attracting mixed-use tenants.
Financials
Investors face many uncertainties in the market, especially after the turmoil caused by the coronavirus and its consequences. In my opinion the best thing to do is look at the fundamentals of a company and its financial health to make an investment decision.
My main concern with MAC’s financial position is the high amount of debt. At the end of 2021 their Net Debt to Forward EBITDA stood around 9.2x, but management intends to reduce this ratio to 8x by 2023. They also intend to raise their liquidity from $635 million to $1,350 million by 2023.
As of late 2021, MAC had approximately $610 million total liquidity. They raised almost $850 million with an equity offering and repaid $1.5 billion in debt year to date, demonstrating management’s dedication to strengthening their financial position. Management expects to generate over $200 million of free cash flow after payments of dividends and capital expenditures, which they will use to further reduce their debt. MAC is also selling non-core assets in order to reduce debt and is focusing on redeveloping property for mixed-use facilities such as co-working and fitness centers in order to cater to a wider public.
Dividend
At the time of writing, MAC pays out a dividend yield of 3.5%. While I don’t consider this a particularly high dividend, I believe management must first focus on getting to a healthier financial position by reducing their debt, after which they can safely increase their dividend.
Risk
As I mentioned before, MAC’s high amount of leverage is my primary concern. However, they survived the pandemic and as the data shows their occupancy rates are returning to safer levels and they continue to adapt to a changing market by attracting mixed-use tenants. Their metrics, such as sales per square foot and rents, are consistently increasing and as such management is seriously addressing paying down their debt. Once MAC is in a stronger financial position, they can focus on increasing their dividends. In the mean time we can catch a good bit of upside by initiating or adding to our position.
Shareholder dilution is also a risk. This happened recently, including in 2021, when management issued additional shares. However, I believe this was done with the long-term perspective in mind and will actually benefit shareholders as management must focus on reducing debt in order to increase shareholder value in the long run.
Valuation
Due to many investors’ “doom and gloom” view of MAC, it is lagging far behind the broader REIT market (VNQ). While these concerns are understandable, I disagree with them because they go against human nature’s fundamental need to connect and experience together. I believe MAC is a solid buying opportunity for those with a sufficient time horizon and risk appetite.
MAC currently trades at 8x P/FFO, while I believe it would trade fairly ~13x P/FFO relative to peers. Therefore, I will continue buying MAC up to $22 while collecting a 3.5% yield.
Source: Divy, a proprietary tool created by the author. I am long MAC.
Conclusion
American magic has always prevailed, and it will do so again.
― Warren Buffett
To summarize, MAC is presently discounted due to the fear that malls suffer from a decline in demand. While this may be true from the perspective of malls being a pure shopping destination, MAC is adapting to the changing retail landscape by attracting mixed-use tenants to their highly desirable locations. While the company currently has a high amount of leverage, management is focused on reducing it in order to put themselves in a stronger financial position and from there be able to increase dividends. I believe MAC is a solid investment for those with a higher appetite for risk and a longer time horizon. These are my assessments, let me know in the comments about yours.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of MAC either through stock ownership, options, or other derivatives. 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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