MAC - Macerich: 6% Dividend Yield Tangible Book Value A Concern

2023-06-30 08:44:41 ET

Summary

• Macerich is currently trading at a 10% discount to its tangible book value per share.
• First quarter revenue slightly declined by 0.6% compared to the previous year but still beat consensus estimates by $10.2 million.
• The REIT's tangible book value per share has been under sustained pressure, with a sequential drop of $0.40 over the fourth quarter. This, along with growing interest expenses, is a cause for concern.

Macerich (MAC) is cheap. The mall REIT is currently swapping hands at a roughly 10% discount to tangible book value ("TBV") per share of $12.57 as of the end of its fiscal 2023 first quarter. The REIT is also trading at a 6.17x price to forward FFO multiple, a 51% discount to its peer group median of 12.60x. Macerich last declared a quarterly cash dividend of $0.17 per share , in line with its prior payout and for a 6% annualized forward yield. It's not hard to see why Macerich is trading at such a discount with quarterly payouts that remain a shadow of their pre-pandemic trendline and as with the mall REIT remains pressured by a $4.5 billion total debt balance as at the end of its first quarter. For bulls, a full recovery of the dividend forms the pertinent need against a TBV that's suffering from consecutive quarter-over-quarter declines.

The 2020 restructuring on the back of the pandemic's outbreak gave the company a breadth of life with performance since then seeing Macerich return 52% on a total return basis. However, the REIT has been met with ten consecutive interest rate hikes. The Fed funds rate now sits at its highest level in well over a decade at 5% to 5.25% with the message from the Fed being that more rate hikes are coming this year. The June pause looks set to be followed by another 25 basis points hike at the July 26th FOMC meeting with the market currently pricing in an 86.8% chance of a hike, up from 81.8% just a day ago. What's the play here? For bulls, it's that Macerich is now a buy with commons trading for 90 cents on the dollar and against first-quarter FFO that beat consensus estimates. However, bears who form the 7% short interest in the company would flag book value that's been under sustained pressure as a reason to avoid the commons.

FFO Comes In Strong As Revenue Stalls

You want to invest in REITs able to grow their year-over-year rental revenue and FFO whilst pushing through ever-higher quarterly dividend payouts. Completing this has proved more difficult for Macerich. The REIT reported first-quarter revenue of $214.85 million , a small 0.6% decline over its year-ago comp but still a beat by $10.2 million on consensus estimates.

Occupancy at 92.2% was a 90 basis points improvement from the year-ago quarter but was a sequential decline from occupancy of 92.6% in the prior fourth quarter. Leasing volumes during the quarter were decent with 256 leases for nearly a million square feet closed, up from 220 leases closed in the year-ago quarter. Trailing 12-month leasing spreads as of the end of the quarter was up 6.6% year-over-year with average rents per square foot increasing by 2.1% over the same time frame to just under $64. This came as same center NOI grew by 4.8% over the year-ago period to push FFO of $0.44 per share.

Critically, while this beat consensus estimates by $0.03 per share, it underperformed FFO per share of $0.50 in the year-ago period. This came as interest expense grew by $5 million over its year-ago comp to $48.83 million. What's worrying is the sustained decline in TBV. TBV per share at around $12.57 was a sequential decline of $0.40 over the fourth quarter and an even larger decline of $0.97 from TBV per share of $13.54 in the year-ago quarter.

Total Returns In 2023

Hence, bears would be right to flag that the discount to book only forms an inherent reason to go long if TBV was not under the type of pressure it is currently being subjected to. Total returns in 2023 will be highly dependent on the company stabilizing TBV and pushing through another dividend raise on the back of a first-quarter payout ratio of 38%. The REIT is guiding for fiscal 2023 FFO to be in the range of $1.75 to $1.85 per share. This would be versus FFO per share of $1.96 for fiscal 2022.

The broader macroeconomic context will remain unhelpful for Macerich as the company works through the implications of FFO also under pressure. Macerich paid off debt worth $169.3 million during the first quarter versus dividends of $36.7 million distributed. I like that the REIT is pushing through multifamily developments on some of its properties as demand for homes in mixed-use locations drives opportunities for these types of developments. For example, the company is building a 110-unit luxury apartment project in its Kierland Common Arizona property. Overall, it's hard to recommend shares as a buy until TBV is stable but Macerich's current discount to book and 6% dividend yield renders it a hold.

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