Mall landlords like Macerich (NYSE: MAC) were at the center of the storm in 2020 as the coronavirus pandemic upended this real estate niche. While the improving trends are definitely good for Macerich, they don't mean that its troubles are over. Here's a quick look at the backdrop as the United States starts moving beyond this health scare.
A tough year
Very early in the pandemic, the U.S. government asked people to work from home and practice social distancing, and nonessential businesses were shut down. Malls, considered nonessential, quickly found themselves at a crossroad.
Tenants unable to open their stores weren't exactly happy to keep paying rent, and early in the pandemic, many didn't. The loss of revenue caused Macerich to cut its dividend twice in 2020, taking the distribution from $0.75/share per quarter to just $0.15.
Macerich is a real estate investment trust (REIT), a corporate structure specifically designed to pass income on to shareholders via dividends. So a single dividend cut is bad, but two in such a short period is terrible. The only way it could have been worse is if the REIT had eliminated its dividend, which is what some of its peers ended up doing as they careened into bankruptcy court.
Even as things start to improve in 2021, there are still substantial problems in the mall REIT space. Washington Prime (NYSE: WPG), for example, just announced that it will need a trip through bankruptcy court to help it manage its debt-heavy balance sheet. So, it's not unreasonable to wonder whether Macerich can avoid a similar fate.
In Macerich's favor, it happens to own a collection of strong malls. Its portfolio includes 46 assets located in wealthy regions with sizable populations. To put this into perspective, the pre-pandemic average sales per square foot at the REIT's properties was $800, putting the company soundly into the mall sector's upper echelon.
The average household income in the regions surrounding its properties is $100,000 per year with exposure to some of the most important markets in the country, including the New York City metro area, California, and Washington, D.C.
With well-located and highly productive assets, Macerich is likely to see a swift turnaround in its business -- a fact that is quickly starting to reveal itself. Although foot traffic is still below pre-pandemic levels, sales at the company's malls have exceeded pre-pandemic rates, meaning people are visiting its properties with an intent to shop.
What's missing are people who just want to stroll around for fun. But the mall business model appears resilient enough to handle the pandemic's hit, and Macerich's high-quality malls are already bouncing back.
For Macerich, the problem is that its balance sheet isn't quite as strong as its malls. To put a number on that, Macerich's financial debt-to-equity ratio at the end of the first quarter was around 2.5 times.
Peer Simon Property Group (NYSE: SPG), one of the strongest names in the space, had a ratio of about 0.75 times. To be fair, Washington Prime's financial debt-to-equity ratio was 12 times (and its malls aren't as productive), making Macerich look like a paragon of health.
However, early in 2021, it was rumored that Macerich was working with advisors on a plan to mend its balance sheet. And then it sold shares, diluting current investors, to fortify its finances.
These aren't comforting moves, noting that Simon acquired a rival during the downturn and, with partners, invested in retailers. But clearly, one of these two REITs was working from a stronger position, and it wasn't Macerich.
How big is the problem?
At this point, given the business upturn and stock sale, it is likely that Macerich will muddle through to the other side of the pandemic headwinds it's facing. Moreover, its well-located malls will likely result in lenders working with the REIT even if the recovery is a slow one.
However, Macerich is definitely not the best-positioned mall player when you look at the big picture. So, if you're looking at Macerich, you might want to take the time to compare it to Simon Property Group. Sure, Macerich's troubles appear to be receding, but that doesn't necessarily mean it's the mall REIT you should buy.