The Macerich Company MAC owns a portfolio of premium shopping centers in the vibrant markets of the United States, with a notable presence in California, the Pacific Northwest, Arizona and the Metro New York to Washington, DC corridor. With robust retail demand and muted new supply continuing to drive the recovery in the retail real estate industry, Macerich remains well-poised to ride the growth curve. However, growing e-commerce adoption and high interest rates make us apprehensive.
What’s Aiding it?
Demand for retail real estate has remained robust over the recent quarters. Amid this, Macerich’s shopping centers, located in densely populated areas having an affluent customer base with a significant disposable income, are witnessing healthy demand from retailers as they continue to rent out more physical store spaces. Moreover, solid tenant demand has helped the company backfill its spaces, which is a positive.
Notably, from the beginning of 2023 through Aug 21, it signed leases for 2.4 million square feet of space, a record. This represented a 34% increase in square footage signed from the prior-year period.
Hence, with an encouraging leasing pipeline, this retail real estate investment trust (REIT) is likely to experience significant rental income growth in the upcoming years. We expect year-over-year growth of 2.9% in total revenues in 2023. For 2024 and 2025, the metric is estimated to increase 3% and 4.2%, respectively.
Macerich efforts to enhance its assets quality as well as customer relationships by increasing the adoption of the omni-channel model, a popular choice among retailers post the pandemic, is likely to pay off well. Also, focusing on the re-use and mixed-use of its properties by recapturing and repositioning anchor tenants will help bring brands to new markets, drive more footfall and boost sales.
Further, the company’s aggressive capital-recycling program and redeployment of the proceeds to fund acquisitions, and development and redevelopment activities highlight its prudent capital-management practices. Per the second-quarter 2023 Investor Presentation, for 2023-2024, management expects to spend an average of $155 million per year on development and redevelopment projects.
Macerich’s healthy balance sheet position with ample financial flexibility is likely to continue supporting its growth endeavors. As of Aug 8, 2023, the company had around $565 million of liquidity, including $405 million of available capacity on its $525 million revolving line of credit.
Shares of this Zacks Rank #3 (Hold) company have gained 4.5% in the past three months against the industry’s fall of 1.7%.
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What’s Hurting it?
Given the conveniences of online shopping, growing e-commerce adoption may weigh on Macerich’s prospects. Online retailing will likely remain a popular choice among customers, thus adversely impacting the market share for brick-and-mortar stores.
A slowdown in the economy amid persistent macroeconomic uncertainty and a high interest rate environment could limit consumers’ willingness to spend under such circumstances, stalling the company’s growth tempo to some extent. For 2023, we project a year-over-year decline of 8.2% in funds from operations (FFO) per share, excluding financing expenses in connection with Chandler Freehold.
High interest rates are a key concern for Macerich. In the second quarter of 2023, a rise in interest expense of $15 million or 7 cents per share negatively impacted FFO per share growth. Further, under the current economic scenario, the company may find it difficult to purchase or develop real estate with borrowed funds as the costs are likely to be on the higher side.
Stocks to Consider
Some better-ranked stocks from the retail REIT sector are Phillips Edison & Company PECO, Essential Properties Realty Trust EPRT and Tanger Factory Outlet Centers SKT, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Phillips Edison & Company’s current-year FFO per share has been raised marginally in the past two months to $2.32.
The Zacks Consensus Estimate for Essential Properties Realty Trust’s 2023 FFO per share has moved slightly upward in the past month to $1.66.
The Zacks Consensus Estimate for Tanger Factory Outlet Centers’ ongoing year’s FFO per share has been revised marginally northward in the past month to $1.88.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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