MAC - Main Takeaways From Macerich's Q2 Results

2023-08-11 03:08:56 ET

Summary

• Macerich's Q2 results show improved occupancy and positive re-leasing spreads, but refinancing maturing debt on favorable terms remains a challenge.
• Falling retailer sales, mainly due to slower EV sales, were disappointing, but retailer bankruptcies remain low and consumers show resilience.
• The company has a large leasing pipeline and is targeting net debt to EBITDA of ~8x by the end of 2024. Shares remain undervalued.

The story hasn't changed much for Macerich (MAC) since the last time we wrote about them, with its Q2 results showing further improvement in occupancy and positive re-leasing spreads, but refinancing maturing debt on favorable terms remains a challenge. It was also a bit disappointing to see falling retailer sales, even if it appears the main reason was lower EV sales. Average sales per square foot for tenants under 10,000 square feet was $853, which is slightly lower compared to last year, mainly due to slower EV sales. On the positive side, retailer bankruptcies remain close to record lows, and consumers continue to show resilience.

For the second quarter, FFO per share was $0.40, affected by factors such as rising interest rates and changes in lease termination income. There is potential for growth in the future given the large leasing pipeline with 2.3 million square feet of new store leases signed but not yet open. Macerich maintained the midpoint of its funds from operations guidance for 2023, which is now estimated in the range of $1.77 to $1.83 per share.

Occupancy

There was an 80 basis point improvement in occupancy compared to the previous year and a 40 basis point gain compared to the previous quarter. Occupancy was at 92.6% at the end of the quarter and is expected to rise above 93% by year-end.

Financing

The biggest headwind for Macerich remains refinancing maturing debt on favorable terms. For that reason, they often rely on one year extensions, hoping that conditions will improve in the future. We found the following exchange between an analyst and CFO Scott Kingsmore, during the Q&A session of the most recent earnings call , was quite interesting. We agree with the analyst that a 7.5% interest rate is quite expensive, but we also understand why Macerich preferred to secure an expensive one-year extension than to wait to the last moment, hoping for lending conditions to improve.

Alexander Goldfarb

Okay. And then, the second question is Danbury Fair Mall. Forgive me for my focus on it, but I drive past it all the time. The parking lot is packed, it's a great asset. And yet, in your release, it only had a 1-year extension. The interest rate went up from 6 up to like 7.5. So, hardly think it's an over-levered asset. But can you just tell us a little bit more about that asset, why it only got the 1-year extension, why the higher interest expense? And then, also, versus Deptford, that one at least had a 3-year extension, was able to keep the same, sub-four interest coupon. If you can give a little bit more perspective, Scott, on what you're seeing in the debt markets and why we're seeing this disparity because, the Danbury one just really stands out, or maybe my expectations of that mall are more than the actual productivity.

Scott Kingsmore

Sure, Alex. I guess, first and foremost, I'm disappointed, you weren't stopping and shopping. Instead you're just driving by looking at the full parking lot. But if you need a better parking spot, just let us know. We'll accommodate you. But good questions. To give you a little overview of what's going on in the financing markets, I mean, we do see them improving. Year to date, as a frame of reference, over $3 billion of mall deals have been financed. We've accounted for about a third of that. During the quarter, as you noted, we did execute on a couple extensions. Those were on average in the mid-fives. Extensions are very strategic for us. They allow us to get to a better time to refinance, a better, more stable climate. If you think about the second quarter, Alex, we're on the heels of a regional banking crisis where credit spreads were gapping out. And there's still a lot of volatility. So, with the pending and looming maturity of July 1st, it made all sense in the world for us to buy an extra year.

We're actually active on Danbury. I agree with you. It's really a great asset. We've spoken to many of the things that are going on there, backfilling anchor boxes. I just talked about Target and Primark occupying Sears, and that's just only one of the few positive events there. So, I do think the asset is very financeable. Like I said, we're very active. Hope to report more in the next quarter or so. It's very strategic for us to secure those extensions and buy some time, get to a better climate. And the second quarter just was not the right timeframe for us.

Leasing

While refinancing has been difficult for the company, it is having much better luck with leasing. The company is delivering double-digit re-leasing spreads again, which were up 11% on a trailing twelve-month basis. Temporary leasing remains elevated at more than 8%, and this presents an opportunity for the company to convert those spaces to permanent leases. Converting these temporary leases into permanent ones presents a good opportunity for rent growth.

Macerich is also doing a good job renewing expiring leases, with commitments for 76% of 2023 expiring square footage already in place, 17% in the letter-of-intent stage. Macerich also has signed leases for 2.3 million square feet of new stores set to open in the coming years.

The company estimates that its leasing pipeline of new store openings now accounts for almost $66 million of incremental rent that should mostly be realized between now and the end of 2025. These are new leases with retailers not yet open and not yet paying rent, and should support same-center NOI growth in 2024 and 2025.

Leverage

Macerich is targeting net debt to EBITDA of ~8x by the end of 2024. CFO Scott Kingsmore sounded confident when he replied to an analyst asking about the company's leverage, adding that this leverage target does not assume any equity issuance.

Our target remains around 8x by the time it gets to the end of next year, the end of 2024. That does not include the assumption of any issued equity. It was really driven by this very, very strong and robust pipeline and growth in EBITDA. So, that's what we are seeing today.

Valuation

Shares remain very undervalued, but we do not see any significant catalyst in the short-term to bring the valuation to a more reasonable level. It seems it will be difficult to change investor sentiment towards malls and shopping centers, despite the numbers showing they have proven more resilient than expected to e-commerce and the post-pandemic behavior changes, like work-from-home.

Historically, shares traded closer to a 14x P/FFO multiple, but now they are valued at roughly half the previous multiple. We continue to believe that shares are undervalued and investors can benefit from an attractive dividend. Still, we do not rule out the possibility that a recession or economic turmoil could cause a significant drop in the stock price.

Risks

We are increasingly worried about the refinancing risk. In the current environment, the company will likely be able to continue refinancing maturing debt, even if it is not with the most favorable terms. However, should economic conditions worsen materially, the company could easily find itself in a situation where it struggles to refinance maturing debt. So far, consumers and retailers have proven incredibly resilient, but a recession could quickly change that as well.

Conclusion

The main takeaway from Macerich's second quarter results is that the company continues making progress with occupancy and rent increases. At the same time, the company continues to experience a difficult lending environment, with high interest rates that are complicating the refinancing of maturing debt. Consumers and retailers have proven resilient, despite higher borrowing costs and elevated inflation. We continue to believe shares are significantly undervalued, but don't see any near-term catalyst that would move the share price closer to fair value. We are maintaining our 'Strong Buy' rating, but do believe risks are significant and that shares could drop by a considerable amount in a recession or if interest rates go much higher from current levels.

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