Dividend investors looking to invest in a high-yield stock that owns great assets will likely find mall landlord Macerich (MAC -1.30%) of interest, given its large 7.2% dividend yield. But there's more to the story here. Competitors have a leg up on this real estate investment trust (REIT) when it comes to balance sheet strength, and that has been, and could remain, a very important difference.
Coming back
Malls like the ones that Macerich owns were shut down during the early days of the coronavirus pandemic. It was a huge blow to the REIT's business and that of its closest peers, like Tanger Factory Outlets (SKT 1.28%) and Simon Property Group (SPG -0.40%). All three ended up either reducing or temporarily eliminating their dividends. But, now that the world has begun to learn how to live with the coronavirus, malls are up and running again and shoppers have returned.
Image source: Getty Images.
All three of these landlords have seen business pick up. Macerich, for example, had portfolio occupancy of 92.2% at the end of the first quarter of 2023, up 0.9 percentage points year over year. That shows that there's solid demand, which helped the company charge 6.6% more rent for expiring leases. That takeaway is buttressed by the fact that 20% more leases were signed than in the year-ago period. Simon Property Group and Tanger are reporting similarly strong trends.
And yet there's a material difference between these three stocks that dividend investors should note. It can be found on the balance sheet. Macerich's debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio comes in at 11.3 times. That's not a small number and it is roughly twice the level of its peers, with Tanger at roughly 5.7 times and Simon at around 5.8 times. Dealing with that extra leverage has been -- and will likely remain -- a drag on Macerich's ability to reward dividend investors.
MAC Financial Debt to EBITDA (TTM) data by YCharts
The problem in numbers
To see just how big an issue Macerich's leverage is, take a look at its dividend. At the start of 2020, the REIT's dividend stood at $0.75 per share per quarter. That was cut twice during the year, leaving investors collecting just $0.15 per share per quarter. The dividend has since been increased, but is only at $0.17 per share per quarter. Given the REIT's solid operating performance, that's not a particularly satisfying change. The dividend is still 77% below its pre-pandemic level.
The laggard dividend recovery comes into greater view when you compare Macerich to Tanger and Simon. Tanger's dividend was $0.3575 per share per quarter before the pandemic led to a temporary dividend suspension. It has now been increased multiple times and sits at $0.245, or about 30% below its pre-pandemic level. Simon's dividend, which was at $2.10 per share per quarter prior to the pandemic, was trimmed to $1.30 in 2020. But it has now been increased multiple times and sits at $1.85. That's just 12% or so below the pre-pandemic level.
So why the big difference in the dividend trajectories of these three REITs? The answer is that Macerich has been focused on mending its relatively weak balance sheet. The cash that might otherwise have gone to shareholders is, perhaps by necessity, going to interest payments and debt reduction. Without that added burden, Tanger and Simon have been able to provide investors with more robust dividend recoveries.
Not enough yield
More aggressive investors might argue that Macerich's big yield provides extra reward for the added balance sheet risk. Notably, the average REIT, using the Vanguard Real Estate Index ETF as a proxy, only yields 4.1%. Tanger, meanwhile, has a far more modest 4.8% dividend yield. But Simon's 7.2% yield is basically on par with Macerich's yield, suggesting that yield-seeking investors looking at Macerich would likely be better off looking elsewhere.
