The retail sector has been hit with a double whammy. First was the retail apocalypse, followed by the coronavirus. As a result, many retail landlords have struggled, particularly in the mall space. But that could spell opportunity for more intrepid investors who pick the right name to own. Macerich (NYSE: MAC) is likely to pop up on your list because of its quality assets. However, Simon Property Group (NYSE: SPG), having an equally attractive portfolio, is probably a better choice. Here are some things to consider when making your final call.
1. The pain is real
There's no question that malls are dealing with big headwinds. Macerich's occupancy was 88.5% at the end of the first quarter, down from 93.1% in the same quarter of 2020. Although the company believes that's the low point, getting back to pre-coronavirus levels will not be a quick or easy task.
That said, Simon's occupancy at the end of the first quarter was 90.8%, down from 94% in the same period a year ago. The drop was similar, but the higher occupancy level gives Simon an edge as it attempts to turn its business around.
2. The mall isn't dead
The recovery is already taking shape as mall real estate investment trusts (REITs) see customer traffic recover. An improving trend was noted during Simon's first-quarter 2021 earnings conference call and Macerich's first quarter 2021 earnings call.
Although customer traffic has not returned to pre-pandemic norms, both companies' sales volumes have recovered to previous levels, suggesting that people are going to the mall specifically to buy things. Put simply, people are still finding value in taking a trip to the mall. So there's a reason for both companies to be positive about the future.
3. Not all malls are created equal
In real estate, there's an old saying: Location, location, location. That's particularly important in the mall sector, where densely populated, wealthy areas are far more profitable than sparsely populated areas with less wealthy residents.
There's also the issue of how well-maintained a mall is compared to the nearby competition. Online buying options have pushed retailers to be more deliberate with their mall locations, which will likely cause fewer malls to shut down. Both Macerich and Simon tend to own better-positioned malls, so they should be fine in the end. In fact, as weak malls close, those remaining are likely to become more desirable to retailers and consumers. That's a positive for both Macerich and Simon and will likely show up in the occupancy numbers over the next year or two.
4. Leverage matters
Malls are fairly expensive to operate and maintain. As such, leverage tends to be a material consideration in the sector, probably where Simon stands furthest ahead of Macerich. To put a number on that, Simon's debt-to-equity ratio is 2.1 times, while Macerich's is a hefty 8.5 times.
If that seems like a big difference, well, it is. Simon has more room materially to maneuver as it looks to get its business back on track. That includes a lesser-interest burden and more room on the balance sheet if it needs to tap the capital markets for cash.
This isn't a small issue. During the 2020 downturn, both Macerich and Simon continued to invest in their malls as needed. However, Simon bought out a competitor and, with partners, invested in a collection of retailers. Essentially, it used the rough patch to ensure it emerged as an even stronger company on the other side. Macerich is basically trying to muddle through. Macerich isn't alone on that front, but Simon's strong financial position is already proving beneficial.
5. Upbeat and downbeat
When Simon reported first-quarter earnings, its 2021 funds from operations (FFO) target increased from $9.50 to $9.75 per share to $9.70 to $9.80. That suggests FFO growth of at least 6.5% this year.
On the other hand, Macerich lowered its FFO guidance from $2.05 to $2.25 per share to $1.77 to $1.97 per share, suggesting that at the high end, FFO will decline in 2021 by nearly 9%. The difference here couldn't be more apparent, with Simon moving from a position of strength and Macerich continuing to struggle.
Go with the stronger name
If you are looking at Macerich, you need to compare it to Simon. Both will likely benefit as the mall sector recovers, but Simon looks like it's better positioned to succeed in today's difficult environment. In fact, Simon is already doing better than Macerich in very important ways. Mall REITs are probably not a great choice for risk-averse investors, but anyone looking at the space should probably stick with the strongest name. Today, that means investing in Simon over competitors like Macerich.