Since early 2021, Macerich (MAC -3.10%) has made a steady recovery from the initial damage of the COVID-19 pandemic. The mall owner's net operating income (NOI) has bounced back along with occupancy and lease rates. Meanwhile, Macerich has gradually improved its balance sheet.

Last Thursday, Macerich reported yet another quarter of solid growth in same-center NOI. It also raised its full-year guidance for adjusted funds from operations (FFO) and same-center NOI.

Despite this momentum, Macerich stock has lost a little more than half of its value since hitting a 52-week high last November. That fear-driven pullback has created a great buying opportunity for patient investors.

The recovery continues

In the second quarter of 2022, Macerich's portfolio occupancy reached 91.8%: up from 89.4% a year earlier and 91.3% at the end of Q1 2022. Furthermore, average rents for small-shop tenants continued to inch up, reaching $60.35 per square foot, compared to $60.19 a year earlier.

The combination of higher occupancy and higher rents drove a 5.4% increase in same-center NOI, excluding lease termination income. The mall REIT also recorded $9.8 million of lease termination income last quarter. Adjusted FFO per share fell to $0.46 from $0.59 in Q2 2021, but this decline related to non-recurring investment gains and land sales in the prior-year period.

Importantly, comparable sales for small-shop tenants at Macerich's properties rose 2.2%, despite a difficult year-over-year comparison. That boosted portfolio sales per square foot to a record high of $860 for the last 12 months: up from $801 in 2019. This is a good sign of tenant health. Indeed, rent increases haven't kept up with the growth in tenant sales in recent years, which could give Macerich opportunities for outsize rent increases in the future.

Redevelopment pipeline will start paying off in 2023

Macerich has been working on numerous redevelopment projects over the past few years. These investments will start to pay off in a meaningful way next year.

For example, Macerich has signed leases with Target for new stores at Danbury Fair Mall and Kings Plaza. Primark is leasing junior anchor space at Green Acres Mall and Tysons Corner Center, and Round1 recently signed leases at Danbury Fair and Arrowhead Towne Center. The company is also adding SCHEELS as a new anchor at Chandler Fashion Center next year. At Broadway Plaza, Macerich will open a Pinstripes dining and entertainment center later this year, followed by a Life Time fitness complex in 2023. Life Time also plans to open at Macerich's Scottsdale Fashion Square later this year.

The bar and dining room of a Pinstripes.

Image source: Macerich.

As these tenants open over the next year or two, they will bring on a significant stream of incremental rent. Equally importantly, they should all be major traffic drivers that help bring more shoppers to Macerich's malls, making those properties even more desirable to other retailers.

Macerich and its joint venture partner have also nearly completed the redevelopment of the former Westside Pavilion mall in Los Angeles into office space for Google. That will unlock a multimillion-dollar annual revenue stream starting next year.

Guidance improves again

Back in February, Macerich projected that it would generate adjusted FFO per share between $1.85 and $2.05 this year, on a 4% to 5.5% increase in cash same-center NOI (excluding lease termination income). In May, it raised its adjusted FFO guidance to a range of $1.90 to $2.04 per share and projected that cash same-center NOI would rise 4.75% to 6.25%.

In conjunction with its Q2 earnings report, Macerich again raised its full-year outlook slightly. It now expects adjusted FFO per share between $1.92 and $2.04 on 5.5% to 6.75% growth in cash same-center NOI.

Unjustified fears

Investors appear to be punishing Macerich stock due to the current environment of high inflation and rising interest rates. High inflation is chipping away at consumers' discretionary budgets, which could reduce sales at malls, while Macerich will face higher interest rates as it rolls over debt.

US Consumer Price Index YoY Chart

U.S. CPI and federal funds rate, data by YCharts.

However, 60% of Macerich's debt consists of fixed-rate mortgages maturing in 2025 or thereafter. Macerich also reduced its debt by $122 million in the first half of 2022 and is poised to continue chipping away at its debt load over the next few years. These factors will limit the impact of higher interest rates on FFO.

Meanwhile, tenant demand for space in Macerich's malls has stayed strong. The affluent customers who drive the bulk of sales at most Macerich properties are still spending, and retailers want to capitalize on that demand pool.

Moreover, real estate has historically held its value well in times of high inflation. This makes Macerich stock look like a great bargain at its current valuation of a little more than five times adjusted FFO.