The COVID-19 pandemic hit mall owners like Macerich (MAC -3.88%) hard during 2020. Fortunately, Americans eagerly returned to in-person experiences -- including trips to the mall -- in 2021. Moreover, strong home price and stock market gains, pandemic-related stimulus efforts, and pent-up demand from 2020 caused consumer spending to surge last year.
This sparked a remarkable turnaround for the U.S. mall industry. Macerich was no exception. Last week, the mall REIT released another strong quarterly earnings report and projected that its results will continue to improve in 2022.
An excellent end to the year
In the fourth quarter of 2021, shopper traffic and tenant sales continued to recover rapidly at Macerich's malls. Comparable small-shop sales increased 12% compared to 2019. Strong sales ensured that tenants could pay rent on time and drove a big increase in percentage rent (variable rent payments based on sales).
As a result, same-store net operating income (NOI) jumped 36% year over year. The REIT reported total NOI of $207 million, compared to $236 million two years earlier. However, some of that decline from its pre-pandemic results was due to Macerich selling a pair of properties last year.
Meanwhile, adjusted funds from operations (FFO) surged 63% year over year to approximately $119 million. On a per-share basis, FFO rose more modestly to $0.53 from $0.45 a year earlier, as Macerich issued a lot of stock last year to shore up its balance sheet. That still beat the analyst consensus by $0.05, though. For the full year, adjusted FFO totaled $2.03 per share, beating the high end of Macerich's most recent guidance, which called for adjusted FFO per share between $1.92 and $2.00.
Macerich still hasn't fully recovered from the pandemic. For example, it ended 2021 with an occupancy rate of 91.5%: down from 94% at the end of 2019. However, the REIT is clearly moving in the right direction. Occupancy has increased significantly since bottoming out at 88.5% in early 2021. Additionally, leasing spreads have turned positive, indicating that rents are rising (on average).
A solid outlook for 2022
For 2022, Macerich estimates that same-center NOI will increase 4% to 5.5% year over year on a cash basis. Adjusted FFO per share should come in between $1.85 and $2.05.
This would represent a slight decrease compared to 2021 at the midpoint of the range. That said, Macerich's 2021 results don't include the full impact of its share issuances, which account for the entire projected decline in FFO per share. The guidance also may be conservative, as management didn't assume that percentage rent payments would continue at the same elevated level seen in 2021.
Macerich is on the right track
Looking beyond 2022, Macerich is well positioned for continued growth in NOI and FFO. First, leasing activity matched the all-time high set in 2015 last year. Some of those new tenants won't open until the second half of 2022 or even 2023, so Macerich won't get the full benefit of those new leases this year. However, the mall REIT is on pace to return to pre-pandemic occupancy levels by the end of 2023.
Second, Macerich significantly reduced its debt load during 2021 and expects to generate excess cash in 2022 that it can use to deleverage further. The company is also interested in selling more assets if it finds good opportunities.
Third, Macerich has a sizable, high-potential redevelopment pipeline. The REIT has control of vacant anchor spaces at several of its best malls, giving it options to build new residential, office, or mixed-use additions to those properties. Macerich and its joint venture partner have also nearly completed a major redevelopment to convert a struggling mall in Los Angeles into high-end office space for Google.
Despite these positive factors, Macerich stock still trades for a bargain valuation of just eight times FFO. That leaves plenty of upside for shareholders as its post-pandemic recovery continues over the next few years.