The last couple of weeks on Wall Street have gotten a little crazy, specifically noting the short- squeeze mania. Mall real estate investment trusts (REIT) like Macerich (NYSE: MAC) got caught up (and then down) in the melee. But there was one giant Macerich investor that made a big change, and it's worth thinking about that move if you own the REIT or any of its peers.
There's no way to describe the short squeezes over the last couple of weeks other than rampant speculation. For long-term investors it should have been a slightly frightening thing to watch. Luckily, it was focused on a relatively small number of individual stocks. One name in the mix was mall REIT Macerich. Only in this case, a very big change took place during the short- squeeze price rally that will have material implications down the line -- the Ontario Teachers Pension Plan sold its entire stake in the REIT.
That's not a small statement. The plan owned 16% of Macerich's outstanding shares. In fact, it was a very big statement. So it pays to consider why this decision was made.
The easiest surface-level answer is opportunity. By Jan. 27, Macerich's stock had more than doubled for the year. Malls, even the high- quality ones Macerich owns, are facing hard times thanks to the combination of the retail apocalypse and the coronavirus pandemic. Stores are being closed in large numbers. Getting beyond these two issues won't be easy, even after vaccines have been widely distributed. Mall REITs need to re-tenant their properties with new stores, and that will take time. Potentially a lot of time. With Macerich shares up 100% in a matter of days, it made logical sense to lock in those gains. That's doubly true given that the other side of a short squeeze is invariably a stock falling back to previous price levels.
What about the long term?
Now that Macerich's stock is coming back down, cooler heads can look at the sector. Mall REITs remain out of favor because their businesses remain under a great deal of pressure. That said, Tanger Factory Outlet Centers (NYSE: SKT), which owns largely outdoor facilities, saw foot traffic over the 2020 holiday season that was roughly 90% of its 2019 traffic despite the pandemic. While indoor centers may not have seen that kind of success because shoppers are afraid of getting sick, the fact that so many were willing to shop in an outdoor environment shows that physical stores aren't going away. People like to go shopping, and that hasn't changed.
Macerich happens to own well-located and high-quality malls. Its properties are likely to survive the retail shakeout, which is really hitting lesser malls the hardest. In fact, the best malls will probably come out the other side even better positioned because there will be fewer places for people to shop, making the remaining locations that much more attractive. That's something of a reverse network effect, but it's one that supports an investment in Macerich.
The problem here is that Macerich's malls come with Macerich's balance sheet. The REIT's financial debt-to-equity ratio was roughly 5.0 times at the end of the third quarter of 2020. That compares to 2.7 times for Tanger and 1.6 times for industry giant Simon Property Group (NYSE: SPG). (The third quarter of 2020 was the last period for which data was available for each of these companies, which hadn't all reported fourth-quarter results at the time of this writing.) In other words, Macerich is not only facing a difficult turnaround business wise, like all of its peers, but it is also trying to navigate this period with more leverage than some of the other options in the mall REIT space.
Which, perhaps, sheds a little more like on the Ontario Teachers Pension Plan's decision to sell. Even if malls do eventually bounce back, Macerich's debt-heavy balance sheet will make it harder for the REIT to muddle through to the other side. If you're looking at the mall REIT space, that's probably a good thing to keep in mind.
The real takeaway
Buying great companies is a big-picture concept. If you look at Macerich's portfolio it would, indeed, look like a great mall landlord with strong turnaround potential. However, you need to dig in a bit deeper, since its leverage is a self-imposed headwind. Given the industry issues and Macerich's debt, it isn't shocking that a big investor decided to sell while it had a chance. If you are interested in the out-of-favor mall sector, you might want to consider following that lead, in a way, and looking at names with stronger financial positions.