Macerich: Increased Customer Traffic Offers Growth Potential

Summary

• I am initiating coverage of Macerich with a BUY rating. High foot traffic and sales productivity in Macerich's Class A malls have improved and are near the 2019 levels.
• Macerich has provided strong Q4 2021 earnings and offered solid FY 2022 guidance. Macerich has also reduced its debts and improved debt coverage ratios in Q4 2021.
• Macerich’s stock is undervalued and is currently trading at a 23.2% discount to NAV of $20.68.

May Lim/iStock via Getty Images

Overview/Investment Rationale

The retail sector has started to improve from the pandemic disruptions. The 2021 holiday season helped increase customer traffics and tenant sales across malls in the US. The Macerich Company (MAC, or 'Macerich') primarily owns and operates in top-class US malls that benefit from the improved US retail markets growth. In recent times, Macerich also reduced its debt with increased cash flow from operations. Macerich has offered strong FY 2022 guidance.

Macerich, a real estate investment trust (REIT), primarily focuses on acquiring, leasing, managing, and developing regional malls throughout the US. As of December 31, 2021, Macerich owned 48 million square feet of real estate consisting primarily of interest in 44 regional town centers.

Please read my STAG Industrial (STAG) thesis to understand the industrial REIT market trends.

Reported Strong Earnings In Q4 2021 And Provided Solid Guidance

In Q4 20201, Macerich reported an FFO of $0.53, beating the consensus estimates by $0.05 (a surprise of 9.4%). The Company generated revenues of $229.4 million, up 17.9% y-o-y, beating the consensus estimates by $23.72 million (a surprise of 10.3%). The Company experienced double-digit tenant sales growth for three quarters in a row, higher than in 2019 levels. Tenants' sales in Q4 2021 increased by 12% compared to Q4 2019. In 2021, the Company also signed more leases than in 2019.Macerich offered FY 2022 guidance with an FFO of $1.85 to $2.05 per share. Same-center NOI growth rate is expected to be a healthy 4% to 5.5%.

Macerich Is Positioned As A Strong Mall Player

Macerich now primarily owns and operates Class A malls. Macerich has disposed of about $4 billion worth of low-quality assets over ten years. It shows that Macerich was able to sell properties that had significant exposure with e-commerce sales and low occupancy. It is expected that online sales will continue to impact brick-and-mortar retail sales over the long run. As a result, many retail companies may think of reducing their store count in the long run. At the same time, foot traffic and sales productivity in Class A malls have recently improved and surpassed 2019 levels. As noted earlier, Macerich’s portfolios are well-positioned in Class A malls; as a result, Macerich should enjoy strong rental growth over the years to come.

Macerich’s Balance Sheet Improved With Reduced Debt

During 2020, the COVID-19 disruption significantly reduced the Company’s earnings, while its debt increased substantially. In Q1 2020, the Company withdrew its remaining capacity of about $1.5 billion from its credit facility. Therefore, the Company’s total debt increased to $8.72 billion in Q1 2020. Like other REITs, Macerich negotiated with its lenders for deferring debt service payments. Once the COVID-19 restrictions ease in 2021, the Company's rent collections and occupancy have improved. In Q2 2021, the Company reduced its total debt to $7.53 billion, a 13% sequential decline compared to $8.66 billion in Q1 2021. In 2021, the Company raised capital through an at-the-market offering (ATM) and divested properties, which helped decrease its debt. In 2021, the Company generated approximately $240 million after paying dividends and recurring capital expenditures. As a result, the Company repaid about $1.7 billion of debt or 20%.

Exhibit 1: MAC's Total Consolidated Debt Trends since Q4 2019

Macerich Filings

I believe Macerich's balance sheet remains strong as the Company operates with a reasonable level of debts and coverage ratios. As seen in Exhibit 2, Macerich's debt coverage ratios have started to improve. Net debt-to-adjusted EBITDA declined from 15.43xin Q4 2020 to 9.72x in Q4 2021. Further, the interest coverage ratio also improved from 2.65x in Q4 2020 to 4.12x in Q4 2021. I believe the Company could reduce its net debt-to-adjusted EBITDA to less than 8.0x over the next few years as the retail sector improves.

Exhibit 2: MAC's Debt Coverage Ratios Trends Since Q1 2020

Macerich Filings

Increased Customer Traffics To Provide Strong Rental Growth

The 2021 holiday has helped increase customer traffics and tenant sales. Despite customer traffic improvement, it is still about 95% of 4Q 2019 traffic levels. At the same time, tenant sales growth has exceeded the 2019 levels.

Portfolio occupancy improved by 180 basis points year-over-year and 120 basis points sequentially to 91.5% in Q4 2021, as seen in Exhibit 3. As of December 2021, trailing 12 months leasing spreads stood at a healthy 4.9%. I believe the Company’s occupancy should increase in 2022 and 2023, primarily attributable to a solid leasing pipeline and the improving retail industry.

Exhibit 3: MAC's Occupancy Trends since Q1 2019

Macerich Filings

For Q4 2021, comparable sales for tenant space less than 10,000 square feet increased by approximately 12% compared to the pre-COVID levels (4Q 2019). Comparable sales for the second and third quarters of 2021 exceeded the pre-COVID levels by 14%. Comparable sales y-o-y growth rate for the fourth quarter of 2021 stood at 35.90%, as seen in Exhibit 4.

Exhibit 4: MAC's Same-Store NOI Growth Rates Since Q1 2019

Macerich Filings

Peers Analysis

Macerich operates in a competitive business environment and competes with numerous malls, shopping centers, and other retail-oriented real estate owners. I have chosen Simon Property Group (SPG), Kimco Realty Corporation (KIM), Regency Centers (REG), Federal Realty Investment Trust (FRT), Brixmor Property Group (BRX), Kite Realty Group Trust (KRG), Tanger Factory Outlet Centers (SKT), RPT Realty (RPT), and Cedar Realty Trust (CDR) as these Macerich’s comparables as they also operate in the retail sector REIT segment and are listed in the US.

Macerich is significantly undervalued compared to its peers, as seen in Exhibit 5. As of March 31, 2022, share price of $15.87, Macerich trades at a forward P/AFFO of 10.3x, a significant 44% lower than the peers’ median forward P/AFFO of 18.5x. Further, Macerich trades at 8.3x of the 2022 FFO estimate versus the peer group at 13.5x, inferring a substantial discount of 39%. Macerich offers a slightly higher forward dividend yield of 3.7% against 3.6% for the peer group.

Exhibit 5: Peers Comparison Analysis

Seeking Alpha

NAV Calculation

I estimate the Net Asset Value (NAV) of Macerich as $20.68 based on the cap rate of 8.0% and an assumed growth rate of 2.0% for the forward growth, as shown in Exhibit 6. The stock is underpriced and is currently trading at a 23.2% discount to NAV. My target price for Macerich is $20.00, almost in-line with its NAV. I believe the Company should generate significant revenues from its class A malls as the occupancy and rental rates improve. The Company is also relatively undervalued compared to its peers. The occupancy rates and same-store NOI are anticipated to strengthen as COVID-19 restrictions ease.

Exhibit 6: Macerich's NAV Calculation

Author's Calculation

Exhibit 7 presents the sensitivity analysis for the NAV estimation with various growth rates and cap rates.

Exhibit 7: Sensitivity Analysis

Author's Calculation

Foot Traffic Has Started To Return 2019 Levels

According to JLL research, a US-based real estate investment management firm, total retail and food services grew by 19.3% y-o-y to $7.4 trillion in 2021. Notably, in 2021, shopping centers' foot traffic increased by 32.2% y-o-y. However, it is still below the 2019 levels. At the same time, foot traffic in sub-urban malls has nearly returned to the 2019 levels. The number of retailers' bankruptcy also declined in 2021 and is the lowest in the last five years. In 2020, 70 major retailers filed bankruptcy, while the number of bankruptcy filings from retailers declined by 77% to just 16 bankruptcies in 2021. Leasing activity has also continued to improve with the solid net absorption since 2017.

Foot traffic at retail centers is expected to rise in 2022 as more COVID-19 restrictions are removed. Tenants now sign long leases, and investors invest more in retail assets, expecting a busy 2022 ahead.

Retails Sector Has Begun To Improve

According to CBRE, the retail sector has a relatively higher cap rate of 6.4% among four major sectors (industrials, office, retail, and apartment). The high cap rate is considered a risky investment. Meanwhile, the retail industry has been improving as discounts to NAV are in the decline phase. As seen in Exhibit 8 below, Grocery retailers are out-performers in the retail industry.

In 2020, COVID-19 severely impacted retail and the economy in general; as a result, shopping centers and regional mall REITs traded at a significant discount of over 40% to their NAVs. As of November 2021, the discount rates for shopping centers and regional malls are just at -2.3% and -8.3%, respectively. This shows investors’ increasing confidence in the retail sector. I believe the trends to continue in 2022 due to a strong appetite for grocery-anchored properties.

Exhibit 8: NAV Discount

CBRE

Risks

E-Commerce growth: the recent surge in eCommerce growth has a significant negative impact on traditional brick-and-Mortar retailers. Consumers continue to change their habits from buying in physical stores to shopping online. Therefore, demand for retail space in malls may decline.

Shifts in consumer behavior: Due to the surge in eCommerce and digital channel advances, consumers have shifted to online purchases. Customer loyalty has declined drastically, and buyers switching brands has increased at an unprecedented rate.

Increased interest rates: The Fed raised interest rates by 25 bps on March 16, 2022, the first increase since 2018. If interest rates have continued to increase, Macerich needs to refinance the maturing debt at much higher rate that will affect the company’s cash flow over a period of time.

Conclusion

I firmly believe Macerich has significant potential to grow its revenues as it primarily owns and operates Class-A malls located in the West Coast area, Arizona, the Metro New York to Washington and DC corridor. The 2021 holiday helped increase customer traffics and tenant sales. I believe the trends will continue in 2022 due to a strong appetite for grocery-anchored properties. In 2021, the Company paid approximately $1.7 billion, or 20% of the debt. Net debt to forward EBITDA stood at 9.72x in Q4 2021, significantly lower than the Company’s net debt to forward EBITDA of 15.43x Q2 2020. Further, Macerich has provided a solid FY 2022 guidance with same-center NOI growth rates of 4% to 5.5%.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

Comments

[harry505]

i would like to see an offer for the company that would put present management and board out of shareholders misery. a couple of years ago in the midst of covid most of us figured this would be a $40 stock and here it is just languishing when real estate prices in most of the country are soaring. just doesn't make sense. I suspect that if someone came along and offered $28 shareholders would jump on it , management and bod would fight it tooth and nail saying it undervalued the company.

[only-temporary]

@harry505 I wouldn't be surprised if private equity, Brookfield or Simon eventually buys it.

[peppydave]

@only-temporary Seems like now would be a time to try for a steal. I'd be disappointed, but i wonder how many would vote down a $20 offer, especially if it was a tax free merger with SPG

[only-temporary]

Today it has a price/FFO of around 6. It owns top level real estate. In my area Tysons Corner is the most valuable land in Northern Virginia. It's got Apple, Starbucks, Barnes Noble, lot's of restaurants. The only way I can see this fail is if management maliciously doesn't like the shareholders and actively works to sabotage the company.

[peppydave]

KRG reported today. $.46 FFO. Stock is at $22.62. 1.6% short. 219 million shares. all similar to MAC except MAC may even be recovering a little better. If you figure KRG will continue to improve and maybe attain $2.00 ffo for the year, their share price is 11 times forward FFO. MAC is expected to do $2.00 or better FFO so its share price is 6.5 FFO. That is a sin. MAC also has 13% short at this bottom of the barrel SP. Almost all of the fundamental defects that would justify a lower multiple of FFO to SP have reversed.
Large unsecured debt- gone
Shrinking occupancy- growing fastest in 7 years
New rental sales- highest in 7 years.
The market with the help of slimmy short sellers can incorrectly value a stock for a significant period of time.
That seems to be the case with MAC. There is a group of short sellers that are spending millions to discourage longs to give up and sell.
This is the time for diamond hands.
The market will wise up, maybe a significant dividend increase will do it. Could be this earnings or August,maybe October but the increase in rentals, FFO and dividend will attract buyers and scare off the short sellers and we will be looking at a $25-$30 share price.
I've been dollar cost averaging down with my last buy at $12.80

[Naples Investor]

@peppydave Thank you for the informative argument why I should add to this position. I think I am down 16% - 18% at this price. Not that big of a position. I can go bigger.

[Naples Investor]

@peppydave Best way to beat back shorts with improved financials is to buy back shares. Increasing the dividend is advertising to others to buy your shares. But buying them back yourself accomplishes the same thing. And if you need to cut back it's not as obvious and disappointing as a dividend cut.

[bengalesq]

"Macerich's debt coverage ratios have started to improve. Net debt-to-adjusted EBITDA declined from 15.43xin Q4 2020 to 9.72x in Q4 2021. Further, the interest coverage ratio also improved from 2.65x in Q4 2020 to 4.12x in Q4 2021."

The ratio mostly improved because of the fill/pay rate in units. Debt is still out of hand - not even close. To say the books look good is ridiculous. Interest coverage will reduce in the upcoming (higher rate) environment. It may do ok and feels out of the woods but it should not trade in line with peers.

[theMEtraders]

@bengalesq how the ratio fills up doesnt matter though, so I do not think your comment is on point. There are always 2 ways to reduce debt to EBITDA: reduce debt or increase EBITDA. I can not understand why you would call that a bad thing. MAC has been doing both at the same time hence the strong decrease in ratio.

Also, they paid down 1.5 BILLION until last ER and have a positive cashflow of 220+ million a year. Saying it improved due to a better performance of their retail assets is just false. Its. just. False. I repeat, FALSE.

With a pipeline of leases coming online, a pipeline of selling non-core assets, positive lease spreads (you read that right!) and a higher lease % of 92+% and possibly the ATM longer term, their debt-to-EBITDA will improve and so should the share price.

At 6 times FFO MAC is a steal and seriously under values, just like it was 12-15 months ago. Mister Market has no f* clue but thanks for the opportunity to add more share to my account. If we have an increase dividend in 2023 this will move higher.

[bengalesq]

@bladeli the fill rent rate I was referring to is your 92%

[JXF12]

Its curious. MAC has been trending down the last several months, while every one of its peers have been trending up.

[Ronaldo123]

@JXF12 exactly. I don't know what happen. I am going to sell all my $mac shares I bought early last year for a small profit. I should have sold last month but didn't pay attention to it until now.

[theMEtraders]

@JXF12 none of its peers are up though .. name 1?

[peppydave]

@JXF12 I agree MAC is doing worse than it’s pears SP wise but a few months ago SPG was $170and it closed today at $118. The entire sector is getting massacred.
I bought some at $13.53 but a lot of mine is under water.

[Xav Welsh]

Over 13% of the float is being shorted. Tough for the stock price…we’ll see if a squeeze eventually materializes

[ButscherDoug]

@Xav Welsh With 9 days to cover, I doubt a squeeze will happen.

[parsat]

@Xav Welsh Does look like something materializing on the front

[Xav Welsh]

@parsat Yes indeed. The coiled spring is up 6.5% today.

[tonor]

Hi, thanks for the report.

I have a few questions about the NAV calculation. The 8.0% capitalization rate seems like a fair guess. How did you come up with that cap rate?

How did you estimate the Development/Redevelopment Identified - NPV and the Land/CIP amounts?

I'm skeptical of mall company reports about traffic. They rarely want to talk about how they've measured it over the years. Analysts should question mall owners' assertions about traffic.

Placer.ai, a retail-focused location analytics provider used by other REITs, reported in February 2022 that weekly visits to indoor malls across the US declined during all 9 weeks of the November-December 2021 holiday shopping season, compared to the same 9 weeks in 2019.

[peppydave]

@tonor An investment in MAC has more than one theory. One is the economy continues to improve from the pandemic and all malls are doing better. Your information from Placer.ai tends to refute that theory.
The theory I am basing my investment on is that there is a surplus of B and C malls and they will drag down all the industrywide statistics. There is not a surplus of A and A+ malls. They will continue to improve and their value is not reflected in their share price yet. MAC is predominately an operator of A and A+ malls.
.

[djacoby5]

@tonor me being in the commercial real estate biz and specifically skilled at valuation, the 8 cap is far too high for class a trophy retail. Pre Covid I’d say a 5 cap but with retail concerns still out there, 6 cap is more likely. Also not sure but their cap may be applied to the GAAP straightline NOI rather than year 1 pro forma. Either way I’d say the NAV here is at least 20% low.

[tonor]

@djacoby5

Unibail-Rodamco-Westfield's "radical reduction of financial exposure to the US" should lead to price discovery for US malls.

When was the last time a class A mall traded hands? The lack of US malls transactions is a red flag for values.

[Naples Investor]

I'm at about breakeven at this price and I agree with the author that this should see about $20 within the next year. Unless we go into a crushing recession.

They need to keep paying down debt and nudging up the dividend.

[peppydave]

@Jeff Durbin I agree but I'm always confused why when the malls sell off, MAC seems to drop a higher percentage than SKT and SPG. I understood when the had a large line of credit balance. Now it is effectively 0.
I don't see the liquidity threat.

[Naples Investor]

@peppydave I think it's about winning back trust.

I'm in GoPro and it's a similar situation. How long do I sit there waiting for the market to realize they have turned a corner and growing again?

[theMEtraders]

@peppydave its because of it's beta. Also, most of MAC volumes comes from ETFs selling at this moment, not really from shareholder dumping. People dumping their ETFS means MAC is getting sold although it's fundamentals are getting stronger.

Means it will go down hard but also bounce hard when those ETFS are getting bought back.

[Archman Investor]

Thank u to the author for the article.

I don’t understand the allure of this stock unless one is “trading” it over the past 30 years . A sad 5.7% CAGR over 28 years “assuming” you had the guts to hold thru the 75% and 90% drawdowns this stock has experienced.
I think it’s been a destroyer of wealth if God forbid you bought it at the wrong time in the past.
It’s got some serious debt and malls are in a slow death spiral.
Based on the low stock price today one might get a trade out if it but I wouldn’t consider this any sort of real solid, long term investment.

[Bryan514]

@Archman Investor It’s not a destroyer of wealth if you entered the stock in early 2020…..or actually anytime in 2020. I’ve been very pleased and I’m looking forward to increased dividends in the years ahead.

[Go4Gold26]

@Bryan514 early 2020? You could have bought any of the stocks in the sector-or of the Mkt as a whole-and done well. The author does appear correct that MAC is undervalued compared to its peers, based on the data he presents. But at a much higher Div, I’ll stick with Dave Simon.

[Archman Investor]

@Bryan514

"it’s been a destroyer of wealth if God forbid you bought it at the wrong time in the past" = This is exactly what "I" stated which is 100% true.

What you stated is 100% true as well.

I want to own stocks that over full market cycles and many years:

1. Provide a CAGR that is at least 10-12%.
2. I also want to own stocks that don't have drawdowns of 75-90% (more than once with MAC) over those full market cycles.

[Actionable Conclusion]

Uh oh... frozen escalators.

Back some 6 years ago I was seeing frozen escalators in the local Macerich Westside property. An old 65% leased, near empty shell way past its prime. Since been repurposed.

Now seeing frozen escalators in the Macerich Santa Monica property. It too is around 65% leased. And the foot traffic is not shopping much outside of food and bev, and Apple and Tesla.

$80 five years ago and now $16? One would expect the dividend to be huge... but MAC had to cut the divy... and cut it severely. Once a favorite of the "high yield" crowd... even some of them have come to their senses and moved on to more fertile ground.

The current mkt does not favor dividend investing. A couple months ago yes, there were some good plays to be had, but now the prices have shot up and the yields are either piss poor, or fat but unwise stocks for investing.

Just one mans take.

Good luck out there.

[Bryan514]

@Actionable Conclusion That’s why it was smart to buy two years ago…..and not so much today.

[aksh21k]

At the current enterprise value one square feet of leasable space valued below $200.

[Nick28]

Got in here in the low $10’s, as it was deeply undervalued due to pandemic impact, but sooner or later will recover. Targeting mid 20’s this year and then will depend on where the economy goes.

[Emerald]

I se MAC at +$18 by the end of 2022, for all the reasons stated in the article. Long a small number of MAC and SPG shares.

[ckarabin]

It certain is cheap, but they do still have the high debt ratio. Much depends on whether we have a recession later this year as looks likely.

[nmcoyote1]

Thanks for the analysis. Along with SPG And Several others I bought MAC at a great price in 2020. I made the poor choice to hold MAC when it hit $20 last year. As I anticipated the long term value to be $27+ as debt was paid down. Debt should drop down close to $5 billion by end of year. Now The waiting game continues.

[therealsully23]

Thanks for posting. The NAV data is helpful. What I think many investors are not recognizing is that the current payout is 30% of FFO. 70%-80% would be a more normal range. While the firm will be using Free Cash Flow to pay down debt for awhile, a return to even a 60% payout rate would be a yield of ~7.6% on the current share price (that assumes FFO does not continue to grow) which it should increase meaningfully as all of the new lease activity converts into cash flow.
It was encouraging to see the CEO and the President step up with some personal capital this week and buy shares. Hopefully management will develop a laser focus on increasing share holder value.
If not, SPG needs to come back after them. Step in, lower the overall funding cost and ramp up the value.

[Pearl Investing]

@therealsully23 Thank you for your comments.

[Badgers360]

@therealsully23 90 percent to keep reit status. Do they lose reit status soon?

[pelican11]

@Badgers360 The requirement to retain REIT status is to distribute to investors >90% of TAXABLE income. As a long time REIT, they monitor that closely every quarter and will not be losing REIT status any time soon.

[peppydave]

Thank you for your analysis.
I’m long for many of the reasons you describe. I hope you are correct
I’m very optimistic

[theMEtraders]

"As a result, many retail companies may think of reducing their store count in the long run. "

You might want to revisit that statement. Retail is actually expanding their footprint/store count as physical locations actually increased online sales :)

[Pearl Investing]

@bladeli Thank you for your comments. I understand that physical stores are the fundamental channel for retailers, and eCommerce still accounts for a small percentage of total retail sales.

However, "E-commerce could kill 30K stores and half a million jobs by 2025" -
www.retaildive.com/...

[theMEtraders]

@Pearl Investing I'm sorry but that's an outdated 2020 article. Here are the newest statistics :

2021:

www.retaildive.com/...

2022:

www.retaildive.com/...

[theMEtraders]

Combine more store with less a-mall space and you understand why MAC/SPG already have or will return to positive lease spreads positively impacting FFO. Debt ratio will naturally trend lower when FFO grows so we could look at an early 2023 dividend increase if they are able to lower debt a little more.