Macerich (NYSE: MAC), which owns around 46 malls, operates in one of the real estate investment trust (REIT) sectors hit hardest by the coronavirus pandemic in 2020. At one point, there were very real questions about its ability to avoid a trip through bankruptcy court -- a path down which several of its peers went. Today that risk is much reduced, but does that mean Macerich is a buy? Read this before you decide.
A good portfolio wasn't enough
One of the most important aspects of Macerich is that it owns a very strong collection of assets. These are located in wealthy areas with large populations, which is exactly where retailers want to put stores. They tend to be the leading properties in the areas they serve as well, making them very likely to survive the ongoing shift toward online shopping. To add some context, prior to the pandemic, Macerich's average net operating income growth rate was higher than that of its closest peers.
That said, even the best malls ended up getting shut down during the pandemic. And the impact was material here, with the company cutting its dividend from $0.75 per share per quarter down to $0.15 per share per quarter -- an 80% decrease. For comparison, peer Simon Property Group (NYSE: SPG), the largest publicly traded mall REIT, cut its dividend by roughly half as much and has already started to increase it again, announcing a nearly 8% hike in June and another 7% increase in August. Macerich's dividend is still sitting at $0.15 per share per quarter.
There are important takeaways from this difference that suggest Simon is the better mall REIT for most investors. This remains true even though Macerich is starting to see much improved property-level results, as are most mall REITs, now that the forced closures are over.
Better and worse
When Simon reported first-quarter earnings, it was clear that the REIT was still facing headwinds. However, it increased its full-year 2021 financial guidance, taking the midpoint of its adjusted funds from operations guidance range up by $0.13 per share.
But the really interesting thing, as management noted during Simon's first-quarter 2021 earnings conference call, was that the biggest change was at the low end of the guidance range. In other words, the company appeared to be confident that the worst was behind it.
That read is buttressed by the fact that the dividend was increased shortly after that report was released. Simon upped guidance again when it announced second-quarter earnings and announced another dividend hike.
In comparison, when Macerich reported first-quarter earnings, it actually reduced its full-year 2021 FFO guidance. And it was a big change, dropping from a range of $2.05 to $2.25 per share when the REIT reported fourth-quarter results to between $1.77 and $1.97 per share just a few months later. That's obviously the wrong direction, and it suggests that Macerich continues to deal with notable headwinds and, perhaps, is still trying to get a handle on just how bad the pandemic hit has been.
When Macerich reported second-quarter earnings, meanwhile, it narrowed its projected 2021 FFO range to $1.79 to $1.94. Excluding one-time items, the range is expected to be $1.82 to $1.97, which is actually not so bad compared to the first quarter update.
But Simon increased its guidance by a dollar per share on the high and low end of the range, and only $0.32 per share was related to one-time items -- which were a positive impact. Macerich's portfolio is holding up, but the REIT doesn't appear to be doing nearly as well as Simon.
One of the key differences between Simon and Macerich is financial strength. Although Macerich has been working hard to reduce leverage, its financial debt-to-equity ratio of nearly 2.5 times at the end of the first quarter was materially higher than Simon's roughly 0.75 times.
Shoring up the balance sheet remains a key priority for Macerich, even as it has capital spending needs to maintain its properties’ leadership positions in the areas where they compete. By the end of the second quarter, it had materially reduced its bank loans and brought its financial debt-to-equity ratio to a more reasonable 1.2 times. That said, Simon's financial debt-to-equity ratio was just 0.65 times at the end of the second quarter.
Given that leverage can limit a company's flexibility, and taking into consideration the different FFO guidance between Macerich and Simon, it seems that Simon is simply in a better place right now. Investors need to be keenly aware of this dynamic, given that Macerich continues to put cash toward debt reduction and not into its portfolio or shareholders’ hands.
To buy or not to buy?
When you add it all up, Simon looks like the better mall REIT option for most investors. However, that doesn't mean that Macerich isn't a name worth looking at for the right type of investor. Indeed, it likely has speculative appeal since it's still working to turn its business around after the brutal hit malls took in 2020.
But such special-situation investing is only appropriate for aggressive investors, severely curtailing the list of people who should be looking at this REIT today. Indeed, it's highly likely that the third quarter will show continued improvement for Macerich, but Simon's business improvement is already translating into increased rewards for shareholders, while Macerich is basically still digging itself out of a debt hole.