MAC - Macerich Corporation

[Mephistopheles]

Macerich is a retail REIT. The price has come down from a $61 52 week high to current price of about $41. Cap rate is 6.6% which is solid for such a high quality portfolio. It's properties do an average of $726 sales per square foot, up from $407 a decade ago. Rent per sqft has increased from $41 to $59 in that same time period.

 

I think that transition to online retail is a net positive for class A malls. As B and C malls suffer or close down, business will consolidate to the highest quality shopping centers, and the evidence does show it. Current occupancy is 95% which has been stable for 5 years, and better than 10 years ago. It deserves a lower cap rate for sure. In my opinion this is a fantastic business selling for a good price.

 

Will add more as I dig deeper, but feel free to share your thoughts.

[Spekulatius]

I am not sure, if I would call operating even class A malls a great business. Looking at the annual report for example, the redevelop some of their properties for ROI of 6.5-8% NOI yields, is this really a great return? Seems more like a hamster wheel to me to prevent the asset from aging and falling off a cliff. NOI growth is just 2% (probably a bit less this year), which is really just the rate of inflation.  It sure is better to invest in A mall who at least grow NOI rather than B or C mall who now show shrinking NOI and are at risk of falling off a cliff when occupancy goes below a critical level, but it’s not great.

 

I think we need BG2008 here to chime in.  I personally don’t like retail RE that much because of the well known headwinds. I’d Rather have a little wind in my back than in the face.

 

Also a comparative  analysis  would be appropriate here - closest peer is TCO, which owns even higher quality malls and has a better track record and behemoth SPG, which has very strong management.

[Mephistopheles]

I am not sure, if I would call operating even class A malls a great business. Looking at the annual report for example, the redevelop some of their properties for ROI of 6.5-8% NOI yields, is this really a great return? Seems more like a hamster wheel to me to prevent the asset from aging and falling off a cliff. NOI growth is just 2% (probably a bit less this year), which is really just the rate of inflation.  It sure is better to invest in A mall who at least grow NOI rather than B or C mall who now show shrinking NOI and are at risk of falling off a cliff when occupancy goes below a critical level, but it’s not great.

 

I think we need BG2008 here to chime in.  I personally don’t like retail RE that much because of the well known headwinds. I’d Rather have a little wind in my back than in the face.

 

Also a comparative  analysis  would be appropriate here - closest peer is TCO, which owns even higher quality malls and has a better track record and behemoth SPG, which has very strong management.

 

Well, the 6.5-8% reinvestment yields are on total capital basis right? So on equity it would be a pretty good return. FWIW, Simon tried to buy Macerich at more than twice the current price. As far as NOI growth - I'm ok with just slight growth at the current cap rate, 6.9%. Agree would love to hear from BG2008.

 

Re TCO - I just crunched the numbers, and it's a little messy given the operating units, but I'm getting a cap rate of 7.7%. Seems a little high but I'm pretty sure I have it right. You're right that it's even higher quality than MAC. What are your thoughts?

[CorpRaider]

SRG is working with 11% ROIs, right?  Then again they are borrowing from WEB at 7%...

[BG2008]

Guys, very flattered.  As Spekulatius mentioned, I am not bullish on retail in general.  One of my largest position is actually an industrial company.  We are seeing lots of trends of Amazon winning shares.  We had a baby boy in the last two years and we have bought 90+% of the products from Amazon.  Costco is still very relevant.  We go to the mall a lot on Long Island.  It's a top 20 mall in the US.  One thing that I have noticed is that even with the GDP running so high and unemployment in the 3% range, the Roosevelt Field Mall on Long Island struggles to fill its tenant.  The problem is with quality tenants.  I have noticed a roster of mom and pop operators, think gold coin, Bonsai trees, etc.  Tenant Improvement is minimal.  I am seeing online only retailers take on physical space, i.e. Mattress, Warby Parker, BlueNile, Peloton, etc.  But the destruction of demand due to bankruptcies etc is too large in my humble opinion.  The quality mix has gone down the tube while we are enjoying the benefits of this unprecedented prosperity. I'd be afraid to own Macerich going into a recession.  Remember a dead mall has an occupancy of 70% not 30%.  I have noticed that a lot of the malls pad their occupancy with lower quality tenants.  It's in my too hard pile. 

[BG2008]

On the sales per sqft, look at the uplift from an Apple Store.  It's a common gimmick in mall business where an apple does something like $5,000 a square foot.  Well, if an iPhone goes for $1,000.  It will do quite a bit of sales.  A 8,000 sqft box with $5,600 sales can really skew the overall figures. 

[Spekulatius]

On the sales per sqft, look at the uplift from an Apple Store.  It's a common gimmick in mall business where an apple does something like $5,000 a square foot.  Well, if an iPhone goes for $1,000.  It will do quite a bit of sales.  A 8,000 sqft box with $5,600 sales can really skew the overall figures.

 

Same with Tesla. Tesla’s Model 3 introduction and sales provided a huge boost to SSS for some malls where Tesla had a presence. Of course now Tesla (which is on shaky financial ground anyways) wants to reduce their mall presence and go online as well, which represents a future headwinds for these malls.

 

Malls are fighting back and they are putting gyms, movie theaters and restaurants etc in mall space, but those are all discretionary spending categories too and might get hit hard in a recession.

 

As far as MAC’ redevelopment yields are concerned, the 6.5-8% yields are unlevered, which means that levered equity ROI may be 10% or so, but they imo isn’t that great either. I had small holdings of Retail Reits in the past, but sold them at somewhat opportune times. I believe there are easier ways to make money in real estate stocks.

[shhughes1116]

Anyone nibbling here, at $27.44 and ~11% yield? 

 

In September, they started the phased opening of the Fashion District in Philly, which should be positive contribution to their cash flow.  And for all of the doom and gloom I hear about the mall business, I don't see the doom and gloom at the Macerich locations I've visited.  Lots of foot traffic, people seem to be spending money.  I certainly can't claim to have visited every location, but I have seen multiple locations while traveling for work, and the 11% yield seems overdone given the foot traffic and physical ground location of their properties.   

 

The future of malls seems to be a mix of retail, lifestyle, and apartments/condos.  Given the physical locations owned by Macerich, seems like they are well-positioned to navigate this transition. 

[BG2008]

I'm still trying to figure out how to make money with retail

[BG2008]

If you are looking at Macerich, you need to ask yourself why is Simon trading at a 5.5% dividend yield while Macerich is trading at 11%.  My gut tells me that Simon owns the best malls.  As retail continues to move towards parcels and warehouses, I think what constitutes a region for a mall continues to broaden out.  For example, Simon owns the Roosevelt Field Mall out on Long Island which I frequent quite a bit.  The Green Acre Mall is a much more lower quality mall.  Over time, I think the Roosevelt Field Mall will eventually take away all the customers from the Broadway Mall in Hicksville and the Green Acre Mall.  There is no need for multiple malls on Long Island when the Roosevelt Field Mall can be your go to.  My gut tells me to wait and buy Simon when we hit a recession and if Simon trades above 10% yield.  Wishful thinking, yes.  But I just cant' bring myself to touch this space. 

 

The problem with real estate that is different than say Plastic Packaging is that the outcome is totally lending dependent in that you can't take a company like a Berry Global and completely deleverage that company within 8-10 years from 5x debt/ebitda.  With real estate, the debt levels are sometimes 10x.  It would take 20-30 years to pay off all the debt.  The premise of most real estate investments is that the banks will continue to finance the debt when there is a major capital project (at least for the higher quality assets).  So, if the banks start changing their views on what the appropriate cap rate is for the assets, you don't really have a sustainable asset anymore in the long run.  The smart people that I see in the space are creating holistic places that is future proof with mixed use developments that offers live, work, play dynamics that includes office, multi-family, and retail.  I think these development are future proof for at least another 20 years which give me more comfort.  The traditional malls are on a collision course with the trend.  I would bet that Amazon and packages continue to eat away at the Malls.  I think the 3.5% unemployment is giving the malls breathing room.  If we ever hit 6-7% unemployment, things can get dicey really quickly. 

[BG2008]

Anyone nibbling here, at $27.44 and ~11% yield? 

 

In September, they started the phased opening of the Fashion District in Philly, which should be positive contribution to their cash flow.  And for all of the doom and gloom I hear about the mall business, I don't see the doom and gloom at the Macerich locations I've visited.  Lots of foot traffic, people seem to be spending money.  I certainly can't claim to have visited every location, but I have seen multiple locations while traveling for work, and the 11% yield seems overdone given the foot traffic and physical ground location of their properties.   

 

The future of malls seems to be a mix of retail, lifestyle, and apartments/condos.  Given the physical locations owned by Macerich, seems like they are well-positioned to navigate this transition.

 

Can you list the locations that you have visited?  Let's try to crowd source the malls on CoBF!!

[Spekulatius]

The smart people that I see in the space are creating holistic places that is future proof with mixed use developments that offers live, work, play dynamics that includes office, multi-family, and retail.  I think these development are future proof for at least another 20 years which give me more comfort.  The traditional malls are on a collision course with the trend.  I would bet that Amazon and packages continue to eat away at the Malls.  I think the 3.5% unemployment is giving the malls breathing room.  If we ever hit 6-7% unemployment, things can get dicey really quickly.

 

As BG2008 noted, many malls better located malls can probably survive which a lot of square footage being repurposed for different uses, like mixed living, offices, restaurant, community centers. The problem that I see with this is that it’s not clear to me that the rents the owner is getting after that conversion is higher than what the malls are getting right now. It may still make sense to do the conversion, when the owner can convert a 8-9% cap rate asset with a murky future into a 5-7% cap rate asset with a supposedly safe future, if you look at NAV and even including the cost of conversion. However, the owner will not see an increase in FFO from this, despite investing more  Capital (or increasing the debt load) although NAV May increase. This is a bit what we are see8ng with all these REITs, their FFO is decreasing, their debt is often flat or increasing too, while they are shedding assets and their NAV supposedly increases. In most cases, Mr Market isn’t given any credit for this, right or wrong. Essentially, these Retail REITs have to paddle hard just to stay put. Sooner or later, the dividends will need to be cut to account for  the higher capital needs and lower cap rates.