One of the first stocks I bought in 2020 was Macerich (NYSE:MAC). With 20/20 hindsight, it was (obviously) awful timing to buy shares of one of the top U.S. mall owners. The COVID-19 pandemic severely disrupted Macerich’s business, causing the stock price to crater. However, I expect Macerich’s collection of mostly top-tier malls to regain their popularity as the pandemic eases over the next couple of years. That should power a strong rebound for Macerich stock.
A terrible year — despite recent momentum
Macerich stock closed at $24.64 on Dec. 31, 2019. Just 10 days later, I added to my existing position in the company at a price just above $25.
In early February, the mall REIT reported solid (though not spectacular) fourth-quarter earnings. Furthermore, leasing activity accelerated during 2019, suggesting that earnings trends could improve over the next couple of years. However, growing fear about the pandemic caused Macerich shares to retreat in the last week of February. That retreat turned into a rout in March. Macerich stock finally bottomed out in early April, closing at just $5.02 on April 2. It remained in single-digit territory for most of the year but has rallied in recent weeks, rising from $6.96 at the end of October to a Thursday closing price of $12.00.
Of course, even after this furious rally, Macerich stock has still lost more than half of its value this year. However, I have no plans to sell. I expect the stock to continue gaining ground over the next few years as Macerich upgrades its properties, replacing tenants that have closed with businesses that have stronger prospects.
Macerich is on the mend
The COVID-19 pandemic is still raging, but Macerich has already moved past the worst of the crisis. For malls that Macerich reopened prior to September, sales had already rebounded to 92% of 2019 levels by September. The REIT probably benefited from the fact that eight of its 20 most productive “malls” are actually open-air centers.
Furthermore, there are promising signs that demand for space in Macerich’s highly productive malls remains strong. Less than 5% of the tenants that had been scheduled to open stores at Macerich properties in late 2020 or 2021 have decided to back out of their leases. Meanwhile, leasing volume has started to recover.
Notably, leasing activity improved long before there was clarity on the timeline for a nationwide vaccine rollout. Today, at least two COVID-19 vaccines are on track to receive FDA approval by year-end. Mass production should scale up quickly, enabling much of the U.S. population to be vaccinated by next summer. That should give retailers, restaurants, and other mall tenants far more confidence to sign leases going forward.
Tremendous long-term upside
Macerich has reported double-digit declines in net operating income (NOI) for the past two quarters. However, most of the damage has come from short-term assistance for hard-hit local businesses, one-time write-offs for bankrupt tenants, and lower ancillary revenue associated with traffic declines.
The recent boom in retail bankruptcies is already moderating. Small businesses have been able to start generating revenue again, so the need for rent relief has started to fade, too. As Macerich backfills empty storefronts and traffic recovers over the next few years, NOI should return to 2019 levels (if not higher). In fact, as an owner of high-quality malls, Macerich could benefit from the 2020 retail shakeout, which is likely to accelerate the trend of lower-productivity malls closing and being converted to other uses.
Back in February, Simon Property Group agreed to buy Taubman Centers — Macerich’s closest competitor — at a 6.2% underwritten cap rate. If Macerich’s NOI recovers and it were valued similarly, Macerich stock would be worth nearly $40. In the long run, low interest rates could warrant an even higher valuation for the REIT. And in 2015, Simon offered to acquire Macerich at a cap rate below 5%. (Lower cap rates imply higher valuations; Macerich unwisely held out for an even better price.)
Obviously, Macerich stock won’t reach $40 or more overnight. But investors will be paid to wait. Macerich currently pays $0.15 per share in quarterly dividends, putting its yield at a solid 5%. REITs are required to pay out at least 90% of their taxable income each year, so dividend payments will move even higher as NOI recovers. Despite a rough 2020, I expect Macerich to be a winning long-term investment.
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