The retail landscape is dismal today thanks to COVID-19, but it won't always be this bad. And when the world finds a way to work past the coronavirus, prime retail assets will again be in demand from both consumers and retailers.
Macerich (NYSE:MAC), a mall real estate investment trust (REIT), owns the type of assets that people will want to visit. There's just one problem with the company.
A great collection
When it comes to mall properties, Macerich is in elite company. It owns a portfolio of roughly 50 properties, many located in markets with high barriers to entry. Generally speaking, its malls are positioned near densely populated and wealthy areas: Roughly 80% of its assets are in the top 50 U.S. markets.
Before COVID-19, Macerich properties generated sales per square foot that ranked it among the top three real estate investment trust mall owners. It held the No. 2 position for rent per square foot. Simply put, retailers wanted to be in its properties because shoppers liked to go to its well-located malls.
Yes, the so-called "retail apocalypse" was an issue. But the heavily leveraged retailers that were struggling to keep up with changing consumer buying habits were slowly falling away. With desirable assets, Macerich could handle that slow-moving train wreck as it looked to muddle through to better days and fill the empty storefronts with new, more desirable tenants.
But there was -- and still is -- just one problem: the REIT's balance sheet.
Stress on top of stress
To be fair, Macerich is nowhere near the worst-positioned mall REIT when it comes to leverage. That ignominy goes to CBL & Associates, which appears to be on the verge of bankruptcy. CBL's financial-debt-to-equity ratio is around 50 times, a shockingly high number. Pennsylvania REIT is also shouldering a heavy debt burden, with a financial debt to equity ratio of around 17 times.
Those are not sustainable debt metrics over the long term, especially since the malls these two REITs own aren't as well-positioned as Macerich's properties. In fact, by comparison, Macerich's financial-debt-to-equity ratio looks tame at 3.9 times.
But as you can see above, Macerich's ratio is still high relative to those of peers, which sport numbers as low as 1.4 times. That's less than half the leverage Macerich is trying to carry around. And some of Macerich's less leveraged peers have equally well-positioned malls. This isn't a new development; this is the normal situation for Macerich.
In the end, leverage is the issue that has long kept me away from Macerich, and it's one you should pay keen attention to. Now that COVID-19 is putting added pressure on retailers -- and the landlords that house them -- the impact of this leverage is obvious.
As the pandemic-related shutdowns earlier this year took shape, Macerich quickly moved to trim its dividend. On paper, the dividend went from $0.75 per share per quarter to $0.50, a 33% haircut. But there's more to the story than this, because only $0.10 of that new dividend level is being paid in cash, with the rest paid in shares. So for dividend investors who were hoping to use the cash distribution to cover living expenses, the cut was a far more painful 87%. To be fair, Macerich wasn't the only mall REIT to cut its dividend -- but with so much debt on its balance sheet, it needed to do more than just cut the dividend 33% to free up cash. And the stock component of the new dividend level was the result.
Ultimately, leverage reduces a company's options when trouble hits. That's a very big issue in 2020, and it will likely remain an issue even after the world has found a way to deal with COVID-19.
Not a bad landlord
Macerich is highly likely to get through the "retail apocalypse" and the COVID-19 hit in one piece. Its malls are probably going to be just as desirable, if not more so, on the other side. However, investors looking at this out-of-favor REIT niche should step back and consider both the quality of Macerich's portfolio and the strength of its balance sheet.
At the end of the day, there are other mall REITs with equally attractive assets that are in better financial shape. The most notable standout is Simon Property Group, which has a strong balance sheet, desirable properties, and more diversity within its portfolio, which spans indoor malls and outlet centers and reaches into a number of foreign markets.