Macerich (MAC, Financial), the $7.76 billion California-based real estate investment trust (REIT), reported a (-)4.2% year-over-year revenue decline to $494.5 million and a far worse (-)79.4% drop in profits to $95.88 million in the second quarter resulting in a 19% margin compared to 90% a year earlier.
The REIT registered a (-)2.3% decline in expenses but what brought the profits into a tailspin was the nearly $470 million gains the company had a year earlier after it sold several interests in its portfolio to other parties (1).
Excluding all these gains in both periods, Macerich would have delivered (-)1.2% decline in profits.
In addition, Macerich provided its 2017 earnings-per-share (EPS) guidance in the range of $1.19 to $1.29 (vs. $3.52 in 2016) and funds from operations per share between $3.90 and $4 (vs. $ 4.08 in 2016).
"While clearly the retail industry faces challenges, we continue to believe it is all part of an ongoing evolution of the shopper experience. Furthermore, we believe our high-quality portfolio remains well positioned as reflected in our strong releasing spreads and tenant sales.
"During the quarter, we continued to take advantage of price dislocation in the market to repurchase our shares at what we believe to be a significant discount to net asset value." –Â Chairman and CEO Arthur Coppola
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Valuations
Contrary to the management’s statement, Macerich’s trailing valuations indicated a hefty premium compared to peers. According to GuruFocus data, Macerich had a trailing price-earnings (P/E) ratio of 53 times vs. the industry median of 17 times, a price-book (P/B) ratio of 2 times vs. 1.1 times and a price-sales (P/S) ratio of 7.7 times vs. 7.5 times.
In addition, Macerich has an appealing 5.09% dividend yield with a 263% payout ratio.
Average 2017 revenue and EPS estimates indicated forward multiples of 8 times and 13.9 times.
Total returns
Macerich has performed poorly this year having returned (-)19.6% total losses to its shareholders compared to the Standard & Poor's 500’s 11.5% gains.
Macerich
Macerich is involved in the acquisition, ownership, development, redevelopment, management and leasing of regional and community/power shopping centers located throughout the U.S.
The company is the sole general partner and owns a majority of the ownership interests in The Macerich Partnership LP.
As of December 2016, the Macerich Partnership owned or had an ownership interest in 50 regional shopping centers and seven community/power shopping centers. These 57 regional and community/power shopping centers (which include any related office space) consist of approximately 56 million square feet of gross leasable area (GLA).
Macerich is a self-administered and self-managed real estate investment trust and conducts all of its operations through the Macerich Partnership and the company's management companies (3).
The shopping center industry
Regional shopping centers
There are several types of retail shopping centers, which are differentiated primarily based on size and marketing strategy.
Regional shopping centers generally contain in excess of 400,000 square feet of GLA and are typically anchored by two or more department or large retail stores (Anchors) and are referred to as Regional Shopping Centers or Malls.
Regional Shopping Centers also typically contain numerous diversified retail stores (Mall Stores), most of which are national or regional retailers typically located along corridors connecting the Anchors.
Community/Power shopping centers
Strip centers, urban villages or specialty centers are retail shopping centers that are designed to attract local or neighborhood customers and are typically anchored by one or more supermarkets, discount department stores and/or drug stores. Community/Power Shopping Centers typically contain 100,000 to 400,000 square feet of GLA.
Outlet Centers
Outlet Centers generally contain a wide variety of designer and manufacturer stores, often located in an open-air center, and typically range in size from 200,000 to 850,000 square feet of GLA.
Freestanding Stores/big box
In addition, freestanding retail stores are located along the perimeter of the shopping centers (Freestanding Stores). Mall Stores and Freestanding Stores over 10,000 square feet of GLA are also referred to as big box.
Anchors, Mall Stores, Freestanding Stores and other tenants typically contribute funds for the maintenance of the common areas, property taxes, insurance, advertising and other expenditures related to the operation of the shopping center.
Macerich currently operates in one business segment, the acquisition, ownership, development, redevelopment, management and leasing of regional and community shopping centers.
(EPS and FFO figures, 10-K and 10-Q filings)
Sales and profits
In the past three years, Macerich had a revenue growth average of 0.38%, a profit growth average of 7.16% and a profit margin of 74.3%.
Cash, debt and book value
As of June, Macerich had $87.1 million in cash and cash equivalents and $4.99 billion in debt with debt-equity ratio 1.3 times compared to 1.16 times (2). Overall debt increased by $75,000 while equity declined by $376,000 year over year.
Macerich had no goodwill nor intangibles in its $9.68 million assets while book value declined (-)8.9% year over year to $3.86 million.
Cash flow
In the first half, Macerich’s cash flow from operations declined by (-)8.2% year over year to $191 million resulting in lower profits and higher cash outflow in relation to its due from affiliates and other accrued liabilities among others.
Capital expenditures were $77 million leaving the company with $113 million in free cash flow compared to $86 million a year earlier. Nonetheless, Macerich provided 3.6 times this free cash flow or $409 million in dividend payouts and share repurchases in the period while having taken in $22 million in debt (net repayments and other activities).
The cash flow summary
In the past three years, Macerich allocated $878 million in capital expenditures, raised $5 million in share issuances and $1.78 billion in debt (net repayments and other activities), generated $479 million in free cash flow, and provided $3.21 billion in dividends and share repurchases with an average free cash flow payout ratio of 652%.
Conclusion
A closer look at Macerich’s recent operations indicated that the significant profit drop should not greatly alarm its investors. Significant gains brought by interest sales in the year prior inflated the REIT’s profits therefore leading to higher deduction in current figures. As a result, the company expects lower profit figures for fiscal year 2017.
In addition, Macerich has a leveraged balance sheet accompanied by amazingly high payouts to its shareholders despite low free cash flow generation and its courtesy of not having to dilute them.
Macerich has an average analyst recommendation of a hold with target price of $64.05 vs. $54.84 at the time of writing.
On the conservative side and turned off by its leveraged balance sheet and significantly generous payouts (652% payout ratio average in the past three years), Macerich is a pass.
Notes
1. Company filings
- Gain on the sale of a 49% interest in the MACHeitman Portfolio of $340.7 million in 2016.
- Gain on the sale of a 40% interest in Arrowhead Towne Center of $104.3 million in 2016.
- Gain on the sale of Capitola Mall of $24.9 million in 2016.
2. Morningstar data
3. Company filings
Macerich Property Management Co. LLC, a single-member Delaware limited liability company; Macerich Management Co., a California corporation; Macerich Arizona Partners LLC, a single-member Arizona limited liability company; Macerich Arizona Management LLC, a single-member Delaware limited liability company; Macerich Partners of Colorado LLC, a single-member Colorado limited liability company; MACW Mall Management Inc., a New York corporation, and MACW Property Management LLC, a single-member New York limited liability company. All seven of the management companies are owned by the company.
4. Company filings
Regional Shopping Centers
A Regional Shopping Center draws from its trade area by offering a variety of fashion merchandise, hard goods and services and entertainment, often in an enclosed, climate-controlled environment with convenient parking. Regional Shopping Centers provide an array of retail shops and entertainment facilities and often serve as the town center and a gathering place for community, charity and promotional events
Regional Shopping Centers have generally provided owners with relatively stable income despite the cyclical nature of the retail business. This stability is due both to the diversity of tenants and to the typical dominance of Regional Shopping Centers in their trade areas.
Regional Shopping Centers have different strategies with regard to price, merchandise offered and tenant mix and are generally tailored to meet the needs of their trade areas. Anchors are located along common areas in a configuration designed to maximize consumer traffic for the benefit of the Mall Stores. Mall GLA, which generally refers to GLA contiguous to the Anchors for tenants other than Anchors, is leased to a wide variety of smaller retailers. Mall Stores typically account for the majority of the revenues of a Regional Shopping Center.
Disclosure: I do not have shares in any of the companies mentioned.
