In other words, mall REIT Macerich thinks it's past the worst of the industry downturn that was precipitated by the coronavirus pandemic. That's wonderful news, of course, but what is backing up that assertion?
For starters, traffic at the REIT's properties has been increasing and was 88% of pre-pandemic levels in the second quarter, up 20 percentage points since the end of 2020. Sales, meanwhile, were 13% above where they were in the second quarter of 2019.
Simply put, people still want to go to malls and spend money. With a collection of well-located assets, Macerich's malls are actually going to benefit from the downturn, because weaker malls that ended up closing make the remaining malls more valuable to consumers and retailers.
On the retailer front, Macerich also noted that leasing activity has started to pick up, with first half of 2021 activity roughly a third higher than the same period of 2019. That helped to support a nearly one percentage point increase in the REIT's occupancy levels between the first and second quarters this year. And, new leases are generally being signed at higher rates than the ones they replace, increasing Macerich's average rent per square foot.
All of the headwinds aren't gone
It really does appear that Macerich is on the mend. But while it looks like Macerich is going to muddle through the pandemic hit to its business, there are lingering issues investors need to keep in mind. The big one that continues to grab headlines is the pandemic that made 2020 so difficult. The world is still trying to figure out how to live with the illness, which is mutating quickly and remains highly infectious. Vaccinations have helped reduce the impact of the illness, but there's no guarantee that the coronavirus won't change in a way that upends normal daily life again. All retail-related investments, and many more, face this same risk, but it's one that you need to remember, and accept, if you are looking at Macerich.
Another big problem for Macerich is its heavily leveraged balance sheet. To put a number on that, while Macerich's financial debt-to-equity ratio of roughly 1.25 times at the end of the second quarter wasn't the highest in the mall REIT space, it was nearly twice the level of peers Simon Property Group and Tanger Factory Outlet Centers. Macerich is aware of the leverage issue and is working to deal with it, but leverage limits flexibility and, in the worst cases, can force a company to make decisions it would rather not make.
For example, Macerich is selling malls today, when the market for such assets is weak. Although trimming out weaker properties is probably a good thing, the timing isn't great. In addition, Macerich is selling stock with the goal of reducing debt. Given that the mall landlord's shares are roughly 35% below where they started out in 2020, it doesn't appear to be a great time to sell more stock. This dilutes current shareholders and obliges the company to pay dividends to more investors.
All in, the future does look like it will be brighter for Macerich, but it isn't out of the woods yet. Notably, the REIT's dividend remains at the same level it fell to in 2020 after being cut to preserve cash. Peer Simon, by contrast, has increased its dividend twice so far in 2021. One of these mall REITs is positioned better today and, even without any more information than the dividend trends, it doesn't take much work to figure out which one that is.
Great property, still a bit risky
Macerich's saving grace is the quality of its portfolio, which generates impressive sales for its tenants. The REIT will likely survive even if there's more trouble ahead because of the coronavirus. But that doesn't make it a low-risk investment, even though the business appears to be on the mend. It remains most appropriate for aggressive investors willing to take on a turnaround play. More conservative types might want to dig into peer Simon Property Group instead.