Macerich: Q4 And Guidance Imply That Upside Is Exhausted (NYSE:MAC)
Back in late Summer 2023, I issued an article on The Macerich Company (NYSE:MAC) downgrading the Stock to a hold due to a massive price surge and relatively stable Q2, 2023 results.
The initial buy thesis was based on the following drivers:
Drastically underperforming Share price relative to the overall retail real estate market and closest peers like the Simon Property Group, Inc. (SPG).
Strong underlying performance with growing FFO and gradual de-leveraging.
Price to estimated FFO multiple at that time was 5.2x, which is clearly attractive both in absolute and relative terms.
However, if we look at the total return performance chart below, we can notice how MAC has managed to maintain its strong momentum, exceeding the results of SPG and the Vanguard Real Estate Index Fund ETF (VNQ).
Now, since we have just received new data points from Q4, 2023 results and considering the reflected run-up in the Stock price, let’s explore MAC’s current position and determine whether it is an attractive buy.
Thesis update and synthesis of Q4 2024 earnings
One of the most critical items that we have to pay attention to is the same center net operating income (“NOI”) figure, which reflects MAC’s ability to add value in an organic fashion (i.e., without relying on M&A).
If we exclude lease termination income, the NOI figure increased by 3% in the fourth quarter of 2023 compared to the fourth quarter of 2022. On a full-year basis, the NOI grew by 4.5% (again, excluding lease termination income).
From this we can take two messages home:
The fact that MAC has registered ~4.5% like-for-like growth implies that there is a strong and durable demand in place for its properties.
Yet, the recent rate of change effects on a quarter-to-quarter basis reflects a decelerating pattern, which is indicative of a more difficult environment for MAC to sustain the level of growth that was achieved in 2023.
The latter point is confirmed by the communicated guidance on 2024 NOI, where the growth, excluding lease termination income, is estimated at 2.25%-3.25% territory. Namely, lower than in 2023.
Furthermore, the PSF statistics indicate the same dynamic.
Looking at the occupancy levels, the conclusion is the same as in the former point. In other words, it seems that there is a favorable demand for The Macerich’s properties: the overall portfolio occupancy increased by 10 basis points up to 93.5% at year-end compared to Q3, 2023.
Then we have to appreciate the dynamics in the re-leasing front, where the relevant spreads were ca. 17% greater than expiring base rents.
What this means is that there is an embedded value in MAC’s leases, which as the future lease maturities kick in should contribute nicely to the incremental NOI generation. However, here we have to keep in mind that this nuance is already factored in the 2024 guidance.
Now, when it comes to the bottom line and the underlying cash generation, the FFO for 2023 actually went down by ~ $0.19 per share despite resilient occupancy levels and solid movement in the top-line number.
The key reason behind this result is the skyrocketing interest expense component. And the driver behind this dynamic is the combination of gradual refinancings at higher interest rates and the size of the underlying debt base.
As we can see from the table above, the weighted average cost of financing has now reached 5.02%, which is closer to the actual market level.
The issue here lies in two aspects:
Short weighted average maturity (around 3.5 years), which translates to sizeable refinancing events in the foreseeable future (including 2024) that will in turn continue to impose headwinds on the FFO front.
Still massive leverage in relation to the EBITDA (around 7.5x), which will trigger relatively expensive cost of debt levels for the new / refinanced loans.
To combat the rising interest costs, the Management already in 2023 took some measures by transitioning into CMBS financing space. As communicated by Scott Kingsmore – Senior Executive Vice President and Chief Financial Officer in the recent earnings call:
In January, we closed $155 million 10-year CMBS refinance of the existing $117 million loan on Danbury Fair. The new loan bears interest at a fixed rate of 6.39% and is interest only during the of the 10-year loan term.
This is clearly lower than the pure market-level financing rate, which for MAC stands at ~8% level (as implied by the variable rate debt part). So, we could assume that MAC will continue to rely on mortgage financing to keep the cost of debt as low as possible.
Finally, in terms of the P/FCF multiple, MAC has recently experienced a huge convergence closer back to its historical levels.
This means that the sole driver of MAC’s outperformance reflected in the very first graph above has been the expansion in the multiple. This makes sense also if we look at the FFO line (reflective of FCF), which has actually gone down over the relevant period.
The bottom line
In my humble opinion, MAC is still a hold with no motivating elements to reconsider this as a buy. The debt amount remains significant, which coupled with the short weighted average maturity life is set to put additional pressure on the FFO going forward. Plus, the fact that like-for-like NOI is decelerating makes the task of growing underlying cash flows rather impossible. If we add to this equation the recent spike in the P/FCF multiple, the story gets even less attractive.
At the same time, I would not recommend shorting this Stock given the value potential of below-market level leases and potential catalysts that could stem from sudden interest rate drops.