The economic closures used to slow the spread of the coronavirus pandemic had a devastating impact on mall real estate investment trusts (REITs). There were mall closures, bankruptcies, and all of the major mall REITs ended up cutting their dividends. Macerich (MAC +2.32%), with a highly desirable portfolio, was not spared any of the pain.
Now that malls have begun to recover, this REIT's 6.8% dividend yield may look attractive to income investors. Before you jump aboard, take a closer look at the balance sheet.
The survivors
It's hard to suggest that any of the major mall REITs are winners as they come out of the pandemic period. But there are three very clear survivors, including Macerich, Tanger Factory Outlets, and Simon Property Group (SPG +0.84%). Macerich and Simon both have a heavy focus on high-quality malls, which tend to cater to wealthy regions with large populations. Tanger is laser-focused on outlet malls, but also tends to own properties that are well-located.
Image source: Getty Images.
While it wasn't pretty for any landlord, good malls really did benefit from the pandemic because it sped up the culling process that had been slowly reducing the number of lower quality malls. This, essentially, increased the importance of the remaining malls for retailers and consumers, both of which now have fewer options.
Highly profitable malls have been particular standouts. Sales per square foot for non-anchor tenants at Macerich's properties in 2022 was a pleasing $869, up from $801 prior to the pandemic. By comparison, industry giant Simon's sales per square foot totalled $753 in 2022, highlighting the comparative quality of Macerich's portfolio.
And yet Macerich's stock is trading down by roughly a third over the past year while Simon's shares are off by "just" 15% or so. So why do investors appear to have a preference for the mall REIT with the less productive malls?
Leverage matters
The big story here is pretty simple: Simon Property Group is financially strong and Macerich is, well, not nearly as well situated. And it shows up fairly clearly when you compare their balance sheets.
SPG Financial Debt to Equity (Quarterly) data by YCharts
Simon's financial debt-to-equity ratio, which looks at debt relative to a company's total market value, is roughly 0.7 times. Macerich's figure is 1.8 times, more than twice as high. That puts the landlord in a far more precarious position as interest rates are on the rise and it has to roll over debt at higher rates.
SPG Total Long Term Debt (Quarterly) data by YCharts
Macerich isn't ignoring the problem -- it has worked hard to reduce its debt load following a spike during the early days of the pandemic. But it started at a higher level of leverage and still remains there, even though it has been more aggressive than Simon with regard to its debt-reduction efforts.
SPG Times Interest Earned (TTM) data by YCharts
Perhaps the biggest indicator of trouble, however, arises when you look at Macerich's ability to cover its trailing-12-month interest expenses. Simon's interest coverage is a solid 4.3 times, which provides ample leeway for adversity. Macerich isn't covering its interest costs, with a times-interest-earned ratio of 0.6 times, which is below the key 1 times level that indicates a company is just able to pay its interest expenses.
Choose wisely
The most interesting thing here may actually be that Macerich's 6.8% dividend yield is only modestly higher than Simon's 6.5% yield. With Simon in so much better shape, financially speaking, it seems like the risk/reward balance of owning Macerich just doesn't add up. If you are looking at this mall REIT, you should strongly consider alternatives like Simon Property Group.
