Heading into late 2023, an article appeared downgrading Macerich Company (NYSE:MAC) to a hold amid a significant surge in price and robust Q2, 2023 results.
The initial impetus to buy was rooted in a few key factors:
- Underperformance of the share price relative to the retail real estate market and competitors such as Simon Property Group, Inc. (SPG).
- Strong operational performance accompanied by growing FFO and gradual deleveraging.
- Attractive price to estimated FFO multiple at 5.2x.
Despite the downgrade, Macerich continued to exhibit strong momentum, surpassing the results of SPG and the Vanguard Real Estate Index Fund ETF (VNQ), as seen in the total return performance chart.
With the arrival of Q4, 2023 results and the subsequent surge in the stock price, it’s crucial to examine Macerich’s current standing to determine its investment appeal.
Analyzing Q4 Earnings and Updated Thesis
One of the pivotal metrics is the center net operating income (“NOI”), reflecting Macerich’s ability to organically add value.
Excluding lease termination income, the NOI rose by 3% in Q4, 2023 compared to the same period in 2022. On an annual basis, the NOI grew by 4.5% (again, excluding lease termination income).
The 4.5% growth suggests robust and lasting demand for Macerich’s properties. However, the decelerating quarter-to-quarter growth rate indicates a challenging environment for sustaining the achieved level of growth.
Additionally, guidance on 2024 NOI forecasts a growth range of 2.25%-3.25%, lower than in 2023, signaling a slowdown.
Occupancy levels and re-leasing dynamics underscore the favorable demand for Macerich’s properties, yet the company’s FFO for 2023 decreased by ~$0.19 per share, attributed to a surge in interest expense.
This increase in interest expense stems from gradual refinancing at higher rates and the size of the underlying debt base, as reflected in the weighted average cost of financing reaching 5.02%.
The combination of a short weighted average maturity and significant leverage relative to EBITDA means that Macerich will face refinancing challenges and high-cost debt levels in the near future.
The Management notably transitioned into CMBS financing, securing a $155 million 10-year CMBS refinance with a fixed interest rate of 6.39% on Danbury Fair, underscoring their intent to keep the cost of debt low.
Despite a convergence in the P/FCF multiple back to historical levels, the company’s outperformance predominantly stemmed from multiple expansion rather than increasing FFO, making its overall outlook bleak.
Assessment and Conclusion
In my view, Macerich remains a hold, with no compelling factors for reconsideration as a buy. The substantial debt quantity and short weighted average maturity will continue to strain FFO. Coupled with decelerating NOI, growing underlying cash flows is a daunting task, rendering the stock less appealing.
However, shorting this stock is not recommended, given the potential value of below-market leases and potential catalysts stemming from sudden interest rate drops.
