Mall real estate investment trusts (REITs) are in a tough spot, with a number of big players having already succumbed to bankruptcy. Although the outlook is brightening, thanks to vaccines, there's still a lot of uncertainty in the air. Macerich (NYSE: MAC) owns well located and productive malls, but it increasingly looks like it's having trouble muddling through this downturn. Here's what you need to know.
The dominos keep falling
In late 2020, mall landlords CBL & Associates and Pennsylvania REIT (NYSE: PEI) both declared bankruptcy. As 2021 is getting under way, there are rumors that Washington Prime Group (NYSE: WPG) is preparing to declare bankruptcy, too, having already missed an interest payment. There are major headwinds facing the mall real estate investment trust (REIT) niche, and these are just a few signs of how bad it really is today.
There's no easy fix, either. For starters, malls are complex ecosystems that need to be curated and maintained so that they remain attractive to both consumers and retailers. It is expensive to keep a large indoor building updated and desirable. And it takes time to find the right tenants to fill vacant space. There's no simple way to navigate either of these issues. The coronavirus pandemic has only made both problems more difficult, increasing costs, reducing foot traffic, and increasing the number of store closures in the retail sector.
Macerich, which owns 47 malls, is actually fairly well positioned as far as its properties go. They tend to be located in wealthy regions with large populations. And, at least before the pandemic, they were some of the most productive malls in the industry. These malls will likely end up better positioned after the pandemic subsides because lesser malls are likely to get shut, reducing the number of options for retailers and consumers. Basically a reverse network effect is likely to take shape. But is that going to be enough?
The rumor mill
Simply put, there are growing signs that owning good malls won't be enough to save Macerich from further troubles. For starters, it has a heavy debt load. While nowhere near the highest in the group, Macrich's financial debt-to-equity ratio is still twice that of Tanger Factory Outlet Centers (NYSE: SKT) and three times higher than industry bellwether Simon Property Group (NYSE: SPG). This is a big deal right now, because malls are facing material headwinds.
To put some numbers on that for Macerich, its occupancy in the fourth quarter of 2020 was 89.7%, down from 94% in the same quarter of 2019. Its revenues, meanwhile, were off by nearly 20%. Funds from operations (FFO), which is a metric that is similar to earnings for an industrial company, was down more than 50% year over year. Although it has been fairly successful in leasing space (activity here was down just 10% compared to the fourth quarter of 2019), it is clearly struggling.
A sign of that can be found in the REIT's dividend, which it first reduced to $0.50 per share per quarter in mid 2020. Only the dividend was paid with a mixture of cash and shares, as Macerich looked to conserve money. Just $0.10 per share at that payment was actually cash. But it eventually reduced the dividend further, to just $0.15 per share per quarter in cash for a total yearly dividend of $0.60 per share. The company specifically stated, "The Board's decision to reduce the dividend allows the Company to preserve liquidity and financial flexibility." That's great for the business, but not exactly great for dividend investors.
Now, there are rumors that Macerich has engaged the services of PJT Partners, according to Bloomberg, which spoke to people "with knowledge of the matter." PJT Partners helps companies deal with debt negotiations. Specifically, Macerich is looking for assistance as it tries to renegotiate a $1.5 billion credit facility that comes due in July. When asked about the issue during Macerich's fourth-quarter 2020 earnings conference call, management didn't really provide a solid answer. That makes sense, given that negotiations are ongoing, but it certainly doesn't provide peace of mind for investors. The thing is, you normally don't hire a debt specialist unless you actually need the help.
As noted, Macerich owns a strong portfolio of malls. However, that fact has to be juxtaposed against its leverage, which is the real issue causing problems today as the business muddles through severe pandemic-related headwinds. With peers like Simon and Tanger that also have strong footprints but less leverage, investors need to tread carefully with Macerich. The risks are higher and the news flow isn't particularly positive right now. Investors looking at the mall REIT space will probably want to err on the side of caution and stick to less-leveraged competitors.