The mall real estate investment trust (REIT) sector got hit hard by the coronavirus pandemic. Even companies like Macerich (NYSE:MAC) that own malls in good locations weren't spared. As the world looks to move past COVID-19 with new vaccines, is now the time to buy this mall REIT, which yields almost 5%? Read this before you do.
Where 5% falls
When you look at the mall REIT sector, there are basically just three companies that still pay dividends: Macerich, with its 4.9% yield; factory outlet center specialist Tanger Factory Outlet Centers at 4.4%; and industry giant Simon Property Group, at 4.5%. By comparison, the S&P 500 Index yields roughly 1.5%, and the average REIT, using the Vanguard Real Estate Index ETF as a proxy, yields 3.8%.
In 2020, when governments around the world closed non-essential businesses in an attempt to slow the spread of the coronavirus, Macerich cut its dividend twice. In the second quarter, it took the dividend from $0.75 per share to $0.50, with a portion paid in stock. Then in the third quarter, it went to an all-cash dividend of $0.15 per share, for a total reduction of 80%.
Macerich's rivals didn't fare any better. Tanger suspended its dividend altogether in Q3 until bringing it back at half its previous level in early 2021. Simon delayed its second-quarter dividend in 2020, but eventually paid it at about 40% below the first-quarter dividend. Others left investors in even worse shape -- CBL & Associates and Penn REIT ended up filing for bankruptcy.
All that, however, is the past. The question now is what the future holds. Macerich's higher dividend yield suggests that investors are a bit more worried about it than they are about its peers.
The leverage issue
To be fair, Macerich owns well-located and -- at least prior to the pandemic -- highly productive malls. But so does Simon. Tanger is a bit different because of the type of assets it focuses on, but it has seen customer traffic to its largely outdoor outlet centers rebound to near normal levels. So this trio appears to own solid properties that should be in demand once the world has a better handle on the coronavirus.
The problem is that owning good assets isn't always enough. Occupancy levels are still under pressure, which means that rents will likely remain weak for some time. And re-tenanting a mall is no simple task -- it is a slow and deliberative process. So weak performance is likely to continue for longer. The companies best able to survive will be those that can muddle through for longer.
On that score, Macerich doesn't stack up particularly well. Its financial-debt-to-equity ratio ended 2020 at roughly 3.4. That's good compared to those of some of its weaker rivals, but Tanger came in at around 1.7, with Simon at an even more agreeable 1. So among the three strongest players, Macerich is the weakest. That makes sense given the deep dividend cut -- it needs the cash more. Macerich and Tanger both sold shares in 2021 to help shore up their balance sheets, so their numbers there will likely change, but at the expense of shareholder dilution. Simon hasn't issued stock so far this year, but it did sell shares in 2020, suggesting it is in a better position right now -- a fact that is highlighted by its solid balance sheet.
At this point in time, it looks like Macerich will muddle through this deep industry downturn. However, it doesn't appear to be the best-positioned player in the sector. That "honor" probably goes to Simon.
The question is really whether a dividend yield half a percentage point higher is enough to compensate investors for owning Macerich over other options. For most investors, the answer will be no, given that Simon is larger and more diversified on top of its stronger financial foundation. In fact, Simon has even been able to use the downturn to invest in its business, while Macerich has basically been working to just get by. Macerich is not a bad company, per se, but it looks like there are better options in the mall REIT sector right now.