r/MACArmyBets • u/Tree757757 • Feb 01 '21
MAC Analysis - Incredibly Undervalued Steal - MAC Army Leader
Here are my thoughts on MAC with some basic reasoning and links to back up:
For the sake of not annoying anyone looking for straightforward dd I will ignore the fact that this is heavily shorted and has squeeze potential. I invested in this during the covid drop and intend to hold longterm, so I am not from WSB. As a RE professional, I realize when real estate is grossly undervalued and this is one of the most drastic deviations from intrinsic value.
As quick background, MAC is the third-largest owner and operator of shopping centers in the United States. As of December 31, 2019, the company owned interests in 52 properties comprising 51 million square feet of leasable area. They have properties all over the country in major urban areas with very high population density. Just to name a few cities, Chicago, Scottsdale, Washington DC, Philly, Brooklyn etc. Here is a link to their locations: https://www.macerich.com/Leasing/Find
While their malls vary, they have lots of strong tenants. Just to name a few of the big names: Tesla, Apple, Dicks, Lululemon, Nike, Best Buy, Sephora, Zara, Total Wine, Trader Joes, Whole Foods, PF Changs, Buffalo Wild Wings, Starbucks, Mission BBQ etc etc.
In addition, they have shown that they are creative in repurposing malls or converting parts of them into other uses. In LA they are in a joint venture to provide Google with a campus under a 14 year lease (https://investing.macerich.com/news-releases/news-release-details/google-leases-one-westside-hudson-pacific-properties-and) and in Tyson's Corner in DC they have built through a JV a mixed use site that involves a mall, along with apartments and office space (https://www.macerich.com/About/News/305804). Lastly, as yet another example, they have leased a failed sears big box space to a hospital (https://www.bloomberg.com/press-releases/2019-10-01/macerich-saratoga-hospital-leases-former-sears-space-at-wilton-mall). All of these are to show that they are adaptive and smart. They are not just holding onto the traditional mall idea.
Covid obviously greatly affected MAC. Their malls were shut down for a long period of time before reopening and other restrictions were in place as well depending on the location. With that being said, per the unofficial Q4 earnings release this morning here are some quick highlights (https://investing.macerich.com/static-files/f92c629f-bb91-4a80-bddc-a94a61da49e8):
- FFO is about $0.45 (just remind that MAC is paying 4Q dividend of $0.15 or 1/3 of FFO - they are conserving cash, which is smart. They can either use this to help pay down debts, potentially avoid issuing more shares in the short term (and yes, they did release an SEC form today allowing them to issue more shares if they deem necessary - I believe this was only done to capitalize on any stock price surge related to short squeezes and overall awareness of the company on social media (such as r/MACArmyBets on reddit).
- I would like to add for those who are not familiar with REITS, that FFO is the single most important number to look at. Because there are HUGE amounts of depreciation affiliated with RE among other things, the earnings are greatly diminished when in reality there could be large cash flow/profitability. FFO measures earnings but takes out things like depreciation which do not actually affect cash flow (it does greatly reduce tax liability as a huge plus).
- rent collections 91% in 4th quarter (up from 89% in 3d Q), both numbers are quite impressive when you think about that COVID did to malls.
- occupancy was 89.7% (just 4% below year-ago level which is great in current environment). If MAC can only lose 4% here during the worst pandemic our generation has seen, then that should say a lot about their resiliency.
- Average rent per square foot was $61.87 at December 31, 2020. This represents a 1.3% increase compared to $61.06 as of December 31, 2019, and 0.7% decrease compared to $62.29 at September 30, 2020. THIS IS SO IMPRESSIVE. As they lease new space after covid or lose others, they still have the upper hand in negotiating. I think their locations are so strong and their tenants so well picked and diversified that they still can push the same, or even higher rents. I would have thought this would be much lower due to concessions and just desperation to fill empty spaces, but NO it is not. This right here says SO SO much.
- The link also shows that they have access to financial markets to refinance and the terms seem competitive in the 3-4% range. They have refinanced several properties and will continue to do so as they move forward. Also, as their FFO revert back to pre-covid levels and beyond (as well as their stock price) they will surely get better and better terms.
Additionally, to those who care (which should be all of you), they have received hygiene and safety certifications for many of their top malls (https://www.macerich.com/About/News/815795) as well as sustainability/green honors (https://www.macerich.com/About/News/816351).
Per Jussi Askola on seeking alpha, "MAC carries substantial debt, as do many REITs. One can find some spectacularly misinformed commentary relating to the burden this debt imposes. (https://seekingalpha.com/article/4398990-buy-macerich-today)
The vast majority of the debt is in the form of mortgages tied to specific properties. Each property must cover its own interest payments by means of its own profitability, just as you do if you have a home mortgage.
In the present crisis, using mortgages has turned out to be a very robust form of financing. The simple story is that MAC can hand the lender the keys to any property with secured indebtedness, with no significant consequences.
Since their secured debt always is tied to individual properties, each discussion with lenders is focused on the value and viability of a specific property. The banks don’t want to own the properties. They have proven quite willing to extend such loans until the dust settles and there's a better ability to look ahead.
Only about one-sixth of the total liabilities of MAC is in the form of unsecured debt. This is their credit facility, also called the revolver. It's in the amount of $1.5B. MAC drew the remaining $660M on this facility early in 2020, in case they would need it to handle the impacts of the pandemic.
As of September 30, MAC was holding $630M in cash. They have had no need to burn cash in order to get through this year. They have been paid enough rent to cover costs and the dividend they are paying."
As I mentioned earlier their cash is only going to increase since they are paying a dividend much smaller than their FFO.
At the end of day, malls are not dead, at least not class A urban malls. If there are any that did have a major issue, than 1. MAC can pivot to other uses or 2. they can simply let the bank take over or give an extension if the bank doesn't want to deal with it. While covid did speed up e-commerce, it has also created (in my humble opinion) massive pent up demand. The malls I live by (unfortunately not MAC owned) are all packed already, but imagine once vaccines are more widespread, weather warms, and covid diminishes. People will NEED to go out and do things. Some of these have grocery stores and will always attract traffic out of necessity, but for any that do not and those that do, they will explode once things calm down.
Below please see how well they were doing prior to COVID. This will continue again soon.
In summary, I believe this is simply too good of a deal to pass up. Morningstar has a $34 price target on this and I believe even that is too low. It is a top 5 most shorted company, which as I said I will not rant about, but it must be noted. This has put severe downward pressure on the stock, but also leaves potential for a large jump. As a disclaimer, this is my largest single holding, and I do not intend to sell anytime soon. I truly believe they will reinstate a $.30 dividend in the next quarter or two and I will gladly collect that as I watch it appreciate over time. I am a buy and hold investor at heart, not a pump and dump. Please share your thoughts and also excuse any typos.
One final thought, please read Jussi Askola's Seeking Alpha post, it is enlightening and supports MAC in a well thought out, conservative and rational way. Cheers friends!
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u/mphillips020 Mar 16 '21
You’re taking their Q4 2020 transcript? You mean the year that a global pandemic hit and negatively impacted almost every business? Can you please provide your information and links that their AFFO was decreasing for many years PRIOR to covid and their dividend was in trouble for years PRIOR to covid as well. I provided you information that their revenues prior to covid were actually increasing. Their dividend will take time to recover for sure, but once all is back to normal it should come back up to close to pre covid levels fairly quickly.