If any conventional wisdom has survived the past few years, it’s this: shopping malls are on their way out.
The huge, indoor spaces that dominated much of 20th Century retail developed mainly out of a gimmick in the tax code and the fact that they could offer indoor air conditioning in an era when few people had that in their homes. Once that appeal faded, malls carried on largely out of their own momentum and the inexplicable success of Hot Topic.
But over the last few decades, malls have suffered through the rise of e-tail and the general shift of consumers away from suburbs and toward the mixed-use streets of cities. At least, that’s what we’ve been told.
So buckle up, because here comes Paul Price with a strong “buy” on shopping malls, or at least one operator in the space.
“When high-end mall operator Macerich (MAC) – Get Macerich Company Report reported last month, the news was all good,” Price wrote recently on Real Money. “Funds from operations (FFO), the preferred metric in evaluating real estate investment trusts came in above estimate. So did revenues, which were up 14.2% vs. revenues from 2020.”
He noted that few industries were as hard hit by covid as shopping malls after government imposed shutdowns and strict protocols which combined to keep customer visits down.
Yet somehow, “after sitting at home during that stretch, people were more than ready to go back to the malls. My own trips to local shopping malls saw very few available parking spaces and crowd sizes that were similar, or bigger, than were seen before March of 2020.”
Shares of Macerich were hit hard, Price noted. “It was forced to issue equity at less than favorable prices last year to ensure balance sheet stability when cash flow dried up. Business is much improved since then and the shares had recovered from an absurdly low $4.80 panic bottom to about $17 on Dec. 13, 2021.”
What is MAC really worth?
Price pointed out that In the pre-Covid years from 2013 through 2019 MAC’s average P/FFO ran about 16.9-times. Its typical yield was around 4.55% during those years.
In addition, “MAC’s average payout ratio (dividends as a percentage of FFO) revolved around 70%. Management prudently cut the dividend during the shutdown period to 15-cents quarterly from 50-cents. That rate is now likely to start climbing again as 2021’s payout ratio is now just 30.6% of 2021’s FFO.”
These are good numbers, and Price thinks they’re likely to get better.