The bears have been in control of The Macerich Company’s MAC shares throughout this year. In fact, so far in the year, shares of this S&P 500 member have depreciated 39.4%, as against the industry’s and index’s rally of 11.3% and 25.2%, respectively.
The company’s portfolio of premium malls is situated in vibrant U.S. markets and densely-populated areas, with affluent consumers having significant disposable incomes. However, investors have considerably lost their confidence in Macerich, thanks to the declines in annual revenues and funds from operations (FFO) for three consecutive years. In fact, investors have had an even rougher run during this time frame, when the stock slumped 62.5% on the bourse.
Notably, share prices of a company reflect not just the underlying business fundamentals, but also indicate investor sentiment. Further, the revenue and FFO trends are much more meaningful indicators of performance, and the retail apocalypse, near-term bottlenecks and declines in FFO per share resulted in a wipeout for this stock.
Year-to-Date Price Performance
Moreover, management’s projection for 2019 adjusted FFO per share of $3.50-$3.58, lower than the reported 2018 tally of $3.85, has further flared up investor skepticism.
Like other retail REITs, there has been no escape from industry shortfall for Macerich in 2019. The e-commerce boom has taken a toll on brick-and-mortar retailing, forcing retailers to reconsider their footprint. This has been a pressing concern for retail landlords like Macerich, Kimco Realty KIM, Taubman Centers, Inc. TCO and SITE Centers SITC, which have been hit hard by store closures and retailer bankruptcies. Such tenant fallouts adversely impact occupancy levels and leasing spreads for landlords.
In fact, according to a Costar Group CSGP article, announced store closures for the current year totaled more than 10, 500 stores as of November 2019.
Further, Forever 21’s bankruptcy filing will affect 15 of Macerich’s stores occupied by the retail brand. This, along with the lease termination with Sears, will likely result in rent reductions and deceleration of same-store net operating income growth.
In fact, the company anticipates a dilution of 8 cents due to lost rents from anchor lease terminations (primarily from Sears) in its 2019 FFO per share. Additionally, a charge of 15 cents is included in management’s 2019 FFO per share guidance, in order to incorporate the impact of change in lease accounting rules (adoption of ASC 842).
Moreover, past asset sales have been thwarting the company’s operating results. Macerich has been disposing weaker-performing malls for the past few years and accordingly, management expects around 3 cents per share of dilution from the 2018 dispositions.
Will 2020 Bring Better Tidings?
Despite the short-term challenges that Macerich is witnessing, the company’s current robust business trends position it well for long-term growth.
In fact, Macerich’s dominant shopping centers in vibrant retail destinations will likely be able to tide over the retail blues. Additionally, amid evolving mall environment, the company is actively adapting to enhance its traditional business model. It has resorted to omni-channel modeling. It is also reducing exposure to department stores and aiming at creating a more vibrant portfolio by embracing more diverse uses.
Accordingly, Macerich has been innovative in leasing its mall space to co-working space providers, digital retailers, who want to open their first physical store, as well as newer types of tenants, in a bid to offer unique shopper experience. Through these efforts, the company is recapturing the previously-vacated anchor boxes.
The company has also been active on the redevelopment front, through which it is undertaking unique and transformative densification projects focused on repurposing the properties as well as improving merchandizing mix.
These efforts are boosting demand and leasing at its properties. In fact, during its third-quarter 2019 earnings call, management noted “we continue to experience very good leasing volumes with year-to-date leasing activity up 29% compared to last year”.
These apart, the company’s enviable productivity metric trends indicate that it will continue attracting tenants. Over the past 10 years, the average base rent has increased from $40.67 to $61.16 (4% CAGR), while sales per square foot grew from $407 to $800 (6.5% CAGR).
CBRE Group’s retail outlook for 2020 states that retail store openings will exceed closures in the upcoming year. This is projected to result in positive net absorption and rent growth in majority of the markets traced by the company. This suggests that the brick-and-mortar sales still constitute anessential part of the total retail sales, though the share has declined steadily.
Stock Down, But Company Far From Over
Although Macerich’s share price has precipitated significantly, the company appears to be taking all appropriate measures as a REIT shopping-center operator. It has high-productive assets in strategic locations and has undertaken apt moves to maximize the value of these properties.
Moreover, the 2020 Zacks Consensus Estimate for this Zacks Rank #3 (Hold) company’srevenues and FFO per share projects year-over-year growth of 3.1% and 1.9%, respectively, hinting at a brighter 2020.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Hence, as its fundamentals remain strong, Macerich’s beaten-down stock price and cheap valuation will steer interest of value investors.
Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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CoStar Group, Inc. (CSGP) : Free Stock Analysis Report
Kimco Realty Corporation (KIM) : Free Stock Analysis Report
Taubman Centers, Inc. (TCO) : Free Stock Analysis Report
Macerich Company (The) (MAC) : Free Stock Analysis Report
SITE CENTERS CORP. (SITC) : Free Stock Analysis Report
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