If you're the type of investor who likes to tread where others are afraid to go because that's where some of the best deals can be found, well, you might be looking at mall real estate investment trusts (REITs) right about now. The mall sector has been deeply impacted by the coronavirus pandemic and there's no quick fix.
But you'll want to tread in this space carefully, and Macerich (MAC 2.35%) is a great example of why.
1. The dividend cut
Macerich cut its dividend in 2020, but that's not odd. So did peers Simon Property Group and Tanger Factory Outlet Centers. However, there was a bit of a difference that could be important as a signal.
Macerich originally trimmed its dividend from $0.75 to $0.50 per share in the second quarter. Only 10% of that dividend was paid in cash, with the rest paid in stock. This was the same tactic mall REITs used during the 2007-2009 recession. However, in the third quarter, Macerich cut its dividend to $0.15 per share in cash, which suggests that the depth of this downturn took management by surprise.
Tanger completely suspended its dividend so it could preserve cash and offer all of its tenants rent concessions. Now that its business has stabilized, it has reinstated the dividend at a lower level. Simon, meanwhile, cut its dividend once, by around 40%, and has held the line since. While these aren't great stories, they do suggest Tanger and Simon both had a better handle on the downturn than Macerich and its double cut.
2. Ins and outs
Macerich owns around 50 properties, most of which are enclosed malls. That's not a great position to be in right now, as consumers have been avoiding enclosed spaces where people can congregate. To be fair, Macerich's malls tend to be well located and highly productive. However, it is far more reliant on indoor space than either Tanger or Simon.
Tanger, as its name implies, owns factory outlet centers. Almost all of its properties are outdoors and consumers are still happily visiting, with traffic in the fourth quarter of 2020 at 90% of 2019 levels despite rising coronavirus cases at the time. Simon, meanwhile, has a roughly 50-50 mix of indoor malls and outdoor factory outlet centers. Both of these REITs are better positioned, property-wise, to muddle through here as consumers slowly get more comfortable with mall shopping.
3. Foundational thinking
Macerich's debt-to-equity ratio is roughly 3.4. That's way better than its peers that have fallen into bankruptcy, like CBL & Associates and Penn REIT. However, when you compare that number to Tanger and Simon, it comes up notably short. Tanger's debt-to-equity ratio is around 1.6, half that of Macerich, and Simon's is just under 1, less than a third of Macerich's figure. Both are on much stronger ground, balance sheet-wise, and that gives them more leeway to deal with adversity.
4. It's not over yet
Which brings up the last point that investors can't overlook. A mall is a highly curated property in which every tenant has an impact on every other tenant. You can't bring a dollar store into a mall filled with high-end retailers; it just won't work. It takes time to find the right tenants. Meanwhile, malls need to be maintained and constantly updated so they remain desirable to consumers and tenants alike. Turning things around after a hit like the coronavirus pandemic is expensive and slow, which means that, of the three mall REITs here, Macerich is probably in the weakest position to recover from the impact.
Relatively less appealing
None of this is to suggest that Macerich is a terrible REIT or that it won't survive (though it has hired advisors to help it renegotiate a credit line, which is not a particularly good sign). The big takeaway here is that if you are looking at a mall REIT like Macerich, well, there are probably better options in the space. Tanger and Simon would likely be a better fit for most investors.