We bought MAC heavily during the COVID shutdowns, as it was one of the simplest levered reopening plays we could find. Their debt was held at the property level, meaning they could dispose of assets to pay down debt if COVID dragged on for many years without the company ever going bankrupt, yet they were trading at prices so far below NAV (net asset value) it looked like most people thought the REIT was going bankrupt. These are our favorite kinds of investments, as we applied the same logic to small cap oil around this time!
There was much more uncertainty around MAC during the shutdowns of 2020, but the recent market selloff has already brought MAC back down to near COVID lows after we were able to fully exit our position at $20+ throughout 2021. The market is once again misunderstanding MAC, mall REITs, and their performance during and after recessions. MAC is in a much better financial position now, and while we do not have grand illusions of another buyout offer from SPG above $90, we feel this is one of the safer high-upside plays in the market today after all of these insider buys.
Company Overview
Macerich is known as the luxury mall REIT. They own Class A malls in dense, urban and suburban areas of the US with a focus on building out town centers that attract top-tier retail clients like Tesla, Apple, Bonobos, Gucci, etc. Their 44 town centers currently under operation have a geographic footprint that skews California, Arizona, and the Northeast.
Over the past 10 years, MAC has disposed of about $4 billion worth of low-quality assets within its portfolio. They saw the writing on the wall for Class B and C properties that had significant exposure with e-commerce sales and low occupancy, and they have turned their entire focus to developing and maintaining Class A malls that are a key part of the omnichannel retail ecosystem for top brands with major online presences. Their experiential shopping town centers are much more resistant to the shift to online retail shopping, and data during the 2021 recovery seemed to prove this out (for now). They are even leasing office space in their town centers to companies like Google, which is opening up a campus at One Westside this year.
Source: MAC 2022 Investor Presentation
This chart illustrates MAC's recovery in leasing activity post-COVID. While many assumed the shutdowns would accelerate the end of box stores, Class A properties from new retail companies have performed at record levels. Even the cumbersome big box properties formerly occupied by department stores like Sears and JCPenney are being repurposed into offices, gyms, and activity/entertainment centers at record rates.
Key Investment Points
We are looking to buy 2024 $12 LEAPS after making money on the $15 2023 LEAPS last year
We are fine skipping the dividend since LEAPS allow us to capture gains int eh underlying stock with a smaller amount of capital outlay
What we really want is the dividend payout to increase over time and yield investors to return to this stock, driving the yield back down to a ~4% average as the stock price increases
Stock Price as of 7/8/22: $8.90
MAC is not the same company it was in 2015 when it received a $91 buyout offer from mall giant SPG... there has been significant dilution over the past couple of years to pay down debt and repurpose properties, AND they have slashed the dividend in the wake of COVID
Through 2018 and 2019, MAC maintained ~151.5 million shares outstanding. However, that number ballooned to 223.2 million by 2022. This is around a 42% increase, and our single largest hang-up on the stock
Nevertheless, the drop in stock price has gone too far, and the company is not as distressed as the stock price would have you believe after raising so much cash in the equity markets
The recession risk and how it relates to MAC appears to be overblown at this point
COVID already “wiped out” many poor performing tenants, and many retailers have stronger balance sheets today than pre-pandemic
MAC has also stated that now it has the shortest tenant watchlist in many years
Upcoming recessionary fears are already widely known today and yet MAC still has a lease pipeline of over 2.7 million square feet
We don't think MAC is going bankrupt any time soon. The company is no longer firing on all cylinders, but it is doing a lot of things right after years of struggling with shutdowns and overleverage.
Only 11% of the debt is floating rate in this rising rate environment.. and most is held at the property level
In April, it closed on a $700 million 3-year renewal of its credit facility and upsized its revolver capacity from $525 million to $800 million
The $848 million in capital raised from issuing common equity contributed to the >$1.7bn (20%) overall reduction in debt in recent quarters
MAC still has slightly less than $2 billion debt due in 2022 and 2023, this amount should still be manageable given that most of their debt is tied to individual properties and an extension is usually amicably arranged. Additionally, MAC still has a $700 million LOC, $120 million of cash, and $700 million of projected cash flow in the upcoming two FYs
MAC will continue to opportunistically sell its non-core assets to de-lever and focus on developing its core assets further
The past few months have seen some significant insider buying in MAC... nobody has a better view of the company's direction than the folks running it, and when they are paying market prices for stock they already own a lot of, good thing usually follow
Board President, Edward Coppola has bought well over $1 million of stock since late March when the stock was at $14.98
CEO Thomas Hern has bought around $500,000 since late March as well
Source: MAC Investor Presentation
MAC is catering to the strongest names in retail in 2022 and diversifying into new entertainment concepts and fine dining options. Already, 60-70% of consumers are conducting omni-channel shopping, with this trend expected to further take off. These will all benefit MAC, which has been pivoting towards experiential shopping and omni-channel tenants since the start of the pandemic.
Key Metrics:
Dividend yield of ~7% despite a measly payout ratio of ~29%
MAC is focusing on paying down its debt to get to the more-acceptable 6-8x range in the near future, which means equity holders don't receive as much of MAC's profit in the form of a dividend
While REITs are technically supposed to pay out 90% of taxable income, they are able to get away with paying a bit less... that said, MAC is only paying out 29% at this time and has plenty of room to double its dividend to a 14% yield and still remain below what most accept to be a proper payout ratio for a REIT
MAC trades at 4.5x FFO while SPG trades at 8.1x FFO on this recent selloff
With most REITs historically trading at an FFO multiple of 14-16x, both of these are simply too cheap, even with a recession on the horizon
SPG deserves a significant premium as the larger ($36bn vs. $2bn) REIT with a better balance sheet and track record, but MAC has one of the cheapest valuations I have ever seen in a REIT outside of the shutdown period
MAC was prepared for rising interest rates -- For inflation, CEO O’Hern revealed in the 1Q22 call that most of their tenants have moved to a fixed-rent increase of around 5% per year, while most competitors have 1-2% escalators
Grossly undervalued based on NAV
Even the most bearish of valuations gets one to a stock price significantly above MAC's current price. This highlights the overblown short-term fears surrounding the impending recession and bankruptcy risk for the company.
The stock has fallen ~70% from its November highs despite continued growth and strong forward guidance
My Favorite Links
From folks much smarter than I....
- Brad Thomas is one of the greatest REIT researchers I know, and he mentions below $10 being an interesting spot to start looking at MAC again
- Nice snapshot of company direction, properties, and financial metrics
- A good illustration of the bearish view on MAC... lacks specific detail and simply concludes past underperformance will lead to future underperformance