MAC - Macerich: This Mall REIT Is Hard To Ignore Because Of Its Fat Dividend Yield

Summary

• The Macerich Company has some high-quality properties under its management and there is a lot of positive news going into the future such as the quality of tenants and redevelopments.
• The stock price has steadily declined over the last few years and this may just be the entry point for informed investors who are also after income.
• The brick-and-mortar retail establishments are struggling, and there is risk in the form of the latest inflation figures (consumer spending could go down), but Macerich's malls are much desired.

Real estate is deemed the best investment in the world. Real estate investment trusts, or REITs, are a great way to get a piece of the action. Founder of Day Trading Academy Marcello Arrambide points out that, "Over time, investors will always get value from real estate" that produces income like a retail space.

Macerich background

Investors should see some real value in The Macerich Company (MAC) with its 49 total regional town centers and community/power shopping centers consisting of around 48 million square feet of gross leasable area. The Macerich Company goes back a long time and was founded in 1964. It went public in 1994 with the IPO priced at $19.75 per share. Over its almost 30-year trading history, the stock has traded as high as $96.60, which it hit on February 2, 2007. The last decade has seen a severe downtrend in the stock price since it peaked at $94.39 on March 13, 2015. There is a good chance that it appreciates in value in addition to providing income, which it is doing in the form of steady dividends.

MAC does boast of an impressive list of Class A malls, among other establishments. The Motley Fool defines Class A malls as those that have sales per square foot at $500 or more. Occupancy levels are generally high at Class A malls, and they feature high-quality tenants.

Santa Monica Place and Broadway Plaza are examples of Class A malls that Macerich owns. The future of Class A malls appears bright given that consumers are becoming increasingly brand-conscious. In-store experiences and entertainment are sought out by mall visitors these days. There are a lot of well-known tenants that Macerich features in its many properties . A lot of the space is being leased out to high profile tenants with a lot of redevelopments and tenant-side constructions in the pipeline. Target Corporation (TGT) has announced plans to open a three-level 90,000 square foot store at Kings Plaza in Brooklyn, New York. Then there is the Irish multinational fast fashion retailer Primark that is looking to open a couple of new two-level stores at Green Acres Mall in New York State and the premier shopping destination Tysons Corner Center in Virginia.

At a time when malls are closing across the country and tenants are evacuating their premises, it is very encouraging to see this piece of news. Best Buy (BBY), Foot Locker (FL), Dick's Sporting Goods (DKS), and Signet Jewelers (SIG) are some of the retailers that make up the ten largest tenants in Macerich properties .

Additionally, regional town centers have been proven to deliver stable income to their owners. The diversity of the tenants and the dominance of this type of shopping center in their trade areas is the reason for this stability .

Recent dividend history may be shaky, but the future payouts could keep rising

Macerich suffered a lot due to the pandemic. As a result, there was a dramatic reduction in the dividend in 2020. However, the REIT's dividend is once again growing with the business doing much better.

The dividend yield currently stands at 5.34%. Even for a REIT, this is on the high side. The payout ratio is 30%, and analysts believe that the current yield is well-covered by earnings. You can check the following link for a comprehensive dividend payout history. The company has been paying dividends since its trading inception and hasn't missed a payout since that time. The unprecedented reduction in 2020 can be excused because of the pandemic.

Late last year, Macerich increased its dividend by 13% to the current $0.17. Still, this payment is much less than the pre-pandemic level of $0.75 per share per quarter. There may just be a good chance that the dividend keeps increasing as we go forward.

FFO beat stands out in recent earnings report

The U.S. mall owner came out with quarterly funds from operations ((FFO)) of $0.53 per share, beating the Zacks Consensus Estimate of $0.52 per share. Nonetheless, there hasn't been any YOY FFO growth as such.

In terms of the FFO, the company has been able to surpass consensus estimate figures three out of four times in the last four quarters.

Macerich's stock gains has greatly outperformed the market so far, and the FFO outlook is vital. We feel that FFO should do alright going by past trends. But the stock was down post earnings release on lower-than-anticipated revenues.

Quarterly revenues of $228.2 million came below the Zacks Consensus Estimate of $235.9 million. Additionally, the figure was lower than the year-ago quarter's $229.4 million.

Nonetheless, there were a lot of positives in the February 7 earnings report despite the revenue miss. Firstly, the company's tenant sales per square foot for spaces less than 10,000 square feet in the trailing 12 months ended December 31, 2022, hit $869 compared with $801 as of December 31, 2019.

Secondly, portfolio occupancy shot up, reaching 92.6% which was higher than the year-ago value of 91.5%.

Thirdly and lastly, same-center net operating income ((NOI)), including lease termination income, went up 0.7% YOY to $215.9 million.

Sale of assets to shore up the balance sheet: A theme nowadays

In recent developments, the U.S. mall owner sold a majority stake in Paradise Valley Mall in Phoenix, AZ for $100 million, to a joint venture on March 29, 2021. The new owners are actually looking to convert the 92-acre site into a community with homes, offices and a grocery store, signifying the future of shopping malls in the country.

The company has a rather strong balance sheet and healthy liquid reserves ($615 million as of November 3). After all, there was a very big gain on assets recorded on September 17, 2021 after Macerich disposed of Tucson La Encantada again in the state of Arizona. Macerich realized $117.2 million in gain on sales of which $100.1 million was used to pay down debt. The deleveraging of the company seems to have been welcomed by investors, as there was a small spike upwards in share value over a period of a week. Additionally, going into November, 2021 there was a peak in the share price.

Macerich has worked hard to take pressure of its balance sheet by addressing its debt maturities. There were a total of three transactions made amounting to about $1.4 billion, which stand to improve the mall owner's liquidity position and place it well for long-term growth.

Acquisitions are a cornerstone in Macerich's strategy

Acquisitions are a core part of the mall owner's four-pronged business strategy. Macerich has positioned itself well geographically and can act quickly when acquisition opportunities come up. When it comes to its leasing and management approach, a diverse tenant mix is sought. On-site property managers are deployed to effectively operate the centers. Redevelopment is another key area of focus with mixed-use densification being done to maximize space. Ground-up development projects are also pursued on a selective basis, and this is the last component of Macerich's business strategy . It does appear from the strategy perspective that Macerich is fully committed to further increase growth opportunities.

About the recent recovery post-pandemic

In 2021, sales growth at physical stores outpaced the growth of online shopping, according to recent data from the U.S. Commerce Department. There has been quite the resurgence in retail sales after the pandemic. One important fact is that retailer margins and profitability are mostly well above pre-pandemic levels .

Leasing demand has bounced back. The trend has been increasing sales growth, and so leasing across the company's portfolio was very strong in 2021. In fact, Macerich signed 833 leases for 3.5 million square feet for the full year representing an all-time company record. You would have to go back to 2015 to see similar square footage leasing volume.

When you look at the quality of the tenants, you can't get better than Google (NASDAQ: GOOG). Macerich's joint venture with Hudson Pacific Properties (HPP) redeveloped One Westside and has delivered 584,000 square feet of creative office space to Google. The search giant is now doing some improvement work.

Most investors, even the very informed ones, would agree that there isn't much room for growth in the retail space. But we believe being a contrarian with regards to this stock may hold you in good stead. Macerich is a mid-cap company, and so the company' growth plans and capex is of utmost importance for shareholders. We did cover another branded retail company and recommended holding the stock. Consequently, we are relatively bullish on this space.

Risks

In terms of risks, we identify the harsh global economic climate to be one. Inflation seems to be high for the foreseeable future, and this can be a headwind for businesses particularly mall REITs. Decreased levels of consumer spending as a result of an economic downturn might reduce foot traffic in the shopping centers and thereby cause a drop in revenues.

Competition is another risk and comes in the form of rival mall developers, shopping centers, and other retail-type real estate. This competition can make it difficult for Macerich by increasing purchase prices and drawing away tenants and Anchors. Any retail-oriented format can take business away such as lifestyle centers, outlet centers and the e-commerce boom that we are experiencing.

Macerich Q4 2022 earnings were rather disappointing, though. Just like we felt, the momentum could not be sustained.

Yet, incomes in America have kept abreast of the cost of living. Higher-income consumers whose numbers keep ever-increasing are more brand-conscious, and this draws them to the in-store experiences and quality retail that Macerich's properties offer.

The future of shopping malls

Coresight Research has estimated that 25% of America's approximately 1,000 malls will shutter their doors by 2025. When you look at current trends , it is evident that this space is showing little sign of recovery.

Nonetheless, a report on the shopping mall's future states that everything is going to be just fine. Shopping malls are going to evolve and transform themselves. The number one reason for the death of most shopping malls is the acceleration of online shopping. Downsizing is something that shopping malls can do to keep costs low and have shoppers come back for the low prices. Still, this is going to be difficult, as competing on price is next to impossible when you have the likes of Amazon (NASDAQ: AMZN) and eBay (NASDAQ: EBAY). A better way would be to add on-site entertainment and restaurants, which will make it appealing for families that visit the mall.

A note on the mall owner's debt

Macerich's debt ratio has dropped over the past couple of years. It currently stands at 1.74; this is fairly good when you take into consideration that the D/E ratio for REITs averages about 3.5. But then again, Macerich is a real estate management company, and these have a D/E of about 1.64 on average. The reason for higher debt ratios across the board (S&P 500 company average debt ratio is 1.51) is because high leverage is accepted in this sector. Large buyout transactions make for higher debt in real-estate companies. The risk does come with rewards, as real-estate companies are seen as one of the most attractive investment options out there with their stable revenue stream and higher dividend yields. Macerich is true to this nature!

Macerich's long-term debt to total asset ratio is 0.55, representing an increase YOY. The company appears to be then progressively becoming more dependent on debt to grow its business, as pointed out by Seeking Alpha Author Philip Eric Jones . However, the long-term debt has actually reduced considerably since the highs of the pandemic.

We think this is the best time to buy Macerich stock for investors who are conversant with this industry and the company.

In our opinion, for an acquisition-led company, it is admirable that the debt ratio is so low.

Each of Macerich's properties has comprehensive liability, fire, extended coverage and rental loss insurance with insured limits typically carried for comparable centers.

Given this information and the market value of MAC at $2.86 billion, one must say that debt and other crises may not drain the company as opined by some analysts on this platform.

Sales per square foot and rent per square foot

From an operations point of view, Macerich's malls are doing alright. Its tenants generated sales of $869 per square foot in 2022, increasing from $801 in 2019, which was pre-pandemic. That's nice to hear, though inflation probably was the reason for the uptrend in this metric.

Another piece of good news is that average rent per square foot was relatively flat standing at $63.06 in 2022, increasing from $61.02 in 2019. Nevertheless, occupancy is down to 92.6% compared to 2019's level of 94%, a drop of 140 basis points. If you were to look at Simon Property Group (SPG), you would see similar figures. However, Simon does have a higher dividend yield and stronger financial foundation. You have to keep in mind that the market cap is $42.4 billion, making Simon a safer bet.

Conclusion - What does Macerich have going for it?

There is upside potential in the MAC stock price and the dividend payout. The same argument that we used for Marathon Oil (MRO) can be applied in this case, too. The dividend yield is much higher in this case, though. Despite the transformation in the space and overall disruption, we do vouch for The Macerich Company stock and recommend buying more at the current price.

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