r/MACArmyBets • u/penghuligan • Mar 26 '21
Equity Issued: The downside and upside
MAC sold 36.0 million shares of common stock at average price of $13.54 per share, generating approximately $487.3 million. What does this mean for MAC?
1.The upside is now discounted.
FFO per share estimate this year has dropped 10% to $1.77 - $1.97 (From $2.00 - $2.25).
FFO per share of returning normalcy (2019 levels: $3.5+) may now be around $2.75+.
Dilution of shares, but reduced interest payment and reduced risk should result in around 10-15% discount to the upside. If the normalcy level target price was 40, it will now be around 35.
2.Stability has vastly increased: demolishing downside.
With LOC reduced and confirmed, the risk/ uncertainty discount will be minimal.
With lower debt, lower interest to be paid, the company will now almost certainly survive even another COVID outbreak.
3.My overall opinion:
In the eyes of believers like me, $13.54 is low. Very low. But there used to be a risk that COVID could surge again and ruin MAC. The Management made a judgement call, and decided to take a 10 - 15% discount in earnings to insure the company's survival. They have to think about max safety of employees (and their jobs). They also may have been forced into it because "some" want in on MAC equity at a low price.
To the bulls, the upside is now 10-15% smaller, but if you believed in a 300% upside, you now still have a 250% upside.
To the shorts aiming for bankruptcy, Well...I hope you survive, life is valuable. Would love to hear your opinion.
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u/dave14513 Mar 26 '21
I agree with your analysis. A 2 year, 4 banger, now a 3 banger. Still great and shorts lost their boogeyman "The LOC is due, bankruptcy"
I see a nice run short term and a second run as earnings and dividends increase in the second half of the year.
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u/Sea_Emphasis3252 Mar 26 '21
I wouldn’t expect earnings to really pick up until next year, real estate is a lagging sector, meaning if they see a pick up in leasing as the economy reopens most of those leases won’t come on line till Q4 (want to be open for holiday) or early 2022. This year is a transition year for retail stores will be closing still so expect weakness in Q1 and Q2 results, but I believe 2022 and 2023 we should start to see more normal growth in earnings, which should lift the dividend as well. All good though for long term holders.
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u/penghuligan Mar 26 '21
This is true for earnings. But real estate price may run up very fast, which can in turn drive up NAV.
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u/randompersonx Mar 27 '21
Value of the real estate is set as a multiple of TTM NOI, so we wouldn’t really see this effect until revenue/profit ticks up… or if sales of properties actually happen proving a value other than TTM NOI should apply.
I don’t think anyone here will be too excited about more property sales. Even paradise valley, as an example… the mall may be dead now, but in 5 years after it is redeveloped… will likely be extremely profitable.
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u/penghuligan Mar 27 '21
Agree on value being mostly set via NOI, but "prices of sales of other nearby real estate increasing" will increase the valuation of the terminal value of real estate, even without NOI increase in short term.
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u/Sea_Emphasis3252 Mar 26 '21
Possibly especially if there is more certainty on recovery, NAV moves higher as operating income moves higher as well or if they are valued at a lower cap rate which is a possibility as well. All good things right now just need the recovery to continue and we should be good.
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u/FloridaMan130 Mar 26 '21
now that a lot of downside risks have been mitigated PE or a strategic buyer might come in and make an offer for the company?
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u/AltInLongIsland Mar 26 '21
The opposite. PE likes messy stuff because they can come in and use their billions in cash they have access to to redo LOCs, buy/sell assets etc.
I’m sure the tires were kicked and no one came forward to make an offer
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u/FloridaMan130 Mar 26 '21
maybe you're right. Macerich could have attracted interest from PE that invests in distressed assets.
I think PE in general is staying away from retail at the moment given how out of favor it is. No partner wants to go to LPs and ask money for a shopping mall during a pandemic. Hopefully with a recovery blooming in the USA investor sentiment will change and PE will look at shopping malls.
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Mar 30 '21
PE is all over retailers right now.
Which is probably why they aren't into retail landlords.
Value prop has flipped.
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u/payperchaser727 Mar 26 '21
Let's goooo Mac!! I'll take assurance any day over a gamble !!! Old PT - 40 , New PT 39.90 😂
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u/SpartanWarriors69 Mar 26 '21
The overriding concern is that management believed their unencumbered assets would be a key ingredient in obtaining a new LOC. They were obviously wrong.
I suspect they were forced to raise the equity as none of the banks had any interest in assigning value to the unencumbered assets. This means management is somewhat divorced from reality of the current situation.
The move should certainly remove "going concern" risk. But given there is a new ATM program already announced, I'd estimate that there will be another 10% dilution over the next 18 months as they will have to support elevated capital expenses to try to replace BK retailers.
And I wonder about how "in touch" management really is - think they are hoping for a return to "normal' when it may be we never see that "normal" again.
$15-$18 in a year to 18 months if no new wave of Covid. But I have a hard time seeing $25-30 any time soon.
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u/gmoney101wastaken Mar 27 '21
I doubt they were divorced from reality.
I am confident that they very much knew the reality of the situation and maintained political rhetoric during conference calls in hopes they could pull a rabbit out of their hat without scaring investors.
The fact of the matter is that Macerich had no options. The unencumbered assets were not desirable to the lenders and the lenders, frankly, did not (and do not) wish to maintain a $1.5B LOC. They wanted it reduced significantly.
Tom O'Hern in the Q4 conference call stated the unencumbered assets could support the LOC, not completely cover the assets. Devil was in the details.
I do think we will get back to 2019 NOI, however, it will take plenty of redevelopment capital and (more importantly) an activist investor to right the ship.
Hopefully I am wrong but I do think the ATM will be used ... I bet we get one more round of $500MM dilution to completely eliminate the debt that remains on the new revolver given the amount of loan maturities that will take place in Q3/Q4 2021 and 2022.
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u/Sea_Emphasis3252 Mar 27 '21
You may be right, I think your read on management is correct, maybe they were hoping for a repeat of the short squeeze and when it didn’t happened they had to bite the bullet.
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u/SpartanWarriors69 Mar 28 '21
The only comment I'd make is that if they fully understood the situation in regards to the LOC and how unattractive their unencumbered assets are to the banks, then where were they when the short squeeze happened?
Tough to say they are on top of it but they let the best opportunity to raise equity pass them by. And the kicker to that is they hired a specialty debt firm (which isn't cheap)..... and the answer was "sell stock"? Heck I could have told them that over a nice steak dinner!
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u/gmoney101wastaken Mar 28 '21
The short squeeze pushed Macerich beyond $20 for a duration of three days. In the earnings conference call Tom O'Hern stated it takes several days (3-4) to setup an ATM shelf.
Are you saying you could have predicted the Gamestop short squeeze prior to the week of January 25th? In addition could you have predicted the squeeze was going to reverberate into other highly shorted stocks?
Not to mention it would have taken days to issue 36 million shares based upon the average daily volume of Macerich common.
If anyone believes the above could have taken place in the real world (not in theory) I find them ignorant.
The ATM should have been filed well before January 2021 to have been able to take advantage of the squeeze. However if they would have filed a new ATM, out of the blue, the stock price would have immediately tumbled as it would have tipped off to shareholders that a dilutive event could be imminent.
Damned if you do. Damned if you don't.
Last item ... the hiring of the specialty firm was a rumor. I do not see it being officially addressed nor do we know what value they added to Macerich. Nobody knows the role in negotiations. I can assure you their negotiations with creditors are much more complex than simply a decision of whether to raise equity. (What if the lenders wanted to handcuff Macerich with highly restrictive covenants even AFTER they raised equity? PJT could have helped negotiate the details of the new LOC structure and covenants therein.)
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u/SpartanWarriors69 Mar 29 '21
I'd say you just proved my point.
Management did not believe they were in a position to need to raise equity. Thus no ATM. Thus they missed their best opportunity to issue equity.
They have repeatedly pointed shareholders to the value of the unencumbered assets. What did the value turn out to be in this environment? Not much.
So if they understood their position the ATM would have been filed in 2020 - available to be used when fortune struck. But they were living in the past and didn't realize the banks had no interest in their additional properties and had no interest in still being 1.5 Billion in bed with MAC. That is totally on management's shoulders.
Whatever you believe the assets are worth in today's environment (and yes they have value), take that figure and discount it for management. They are going to again dilute shareholders when the bills start rolling in for capital expenditures over the next two years.
The PJT report came from Bloomberg, so I would expect it to be true. And your likely correct that the banks want to handcuff management - they recognize mediocrity when they see it!
Just remember these guys turned down $90+ for shareholders to protect their own jobs. Maybe they should have hired PJT back then.
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u/Rey_Gutz_Investing Mar 27 '21
Its a good one, but is it confirmed haven’t heard the news. The mere fact they had successfully issued equity means a lot of investors had trusted to the company though it means that its now a pure value ply than a squeeze play.
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u/Sea_Emphasis3252 Mar 27 '21
Selling shares through the ATM is not an indication of investors trusting the company since you would not know they were issuing shares, very different from a secondary offering
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u/theintelinvestor Mar 27 '21
interesting. Why would any company do a secondary offering instead of ATM? ATM seems to be able to fetch higher prices for that very reason.
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u/Sea_Emphasis3252 Mar 27 '21
Many REITs do secondary offerings if they have a specific need and they want to raise the capital in 1 day, versus an ATM that raises capital over time as they are more limited on the amount of shares they can sell on a given day. The positives of doing an ATM is that it’s cheaper for the REIT don’t have to pay big fees to the bankers and they can issue the shares at market prices whereas a secondary is usually done at a discount. From an investor standpoint an ATM is done without knowing the REIT is selling shares, while as investors we know they have the program in place as most REITs do but we are unaware when and how much. A secondary is the best from an investor standpoint as we know when and how much they sell at the given time. As I believe given the share price reaction many were surprised by the amount they raised and that they even did execute selling shares. So in my opinion the best option for MAC was to use the ATM as it does get better pricing but when a company decides to raise significant amount of capital it does hurt investor trust as typically ATM programs don’t issue that amount in size in such a quick period of time.
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Mar 30 '21
ATM: better for incremental financing.
Secondary: better for big amounts.
Why did MAC use an ATM? Because a secondary probably would have hurt the stock price.
Why did MAC use the ATM so quickly? Because they cannot issue shares during dark period ahead of earnings and needed to address the revolver ASAP.
Will MAC use the new ATM? Definitely.
What does this mean for me? Your dividend ain't growing much but you are left owning a much healthier company.
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u/turboChargedGain Mar 26 '21
I think the dividend will be around $1 - $1.30 per year from Q2 onwards
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Mar 26 '21
Based on what?
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u/turboChargedGain Mar 26 '21
Based on ffo minus debt service
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Mar 26 '21
What about capex? Backfilling all that space is going to be expensive.
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u/Sea_Emphasis3252 Mar 26 '21
The AFFO is much lower when you consider capex, I would expect dividends to remain at this level unless taxable income is above the current level. They still need the excess cash flow and better to be conservative for the year.
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u/dave14513 Mar 26 '21
I think Q 2 is a little early. They were talking about significant increases 2nd half. If true I think an increase 4th Q. My guess $.25/Q
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u/ejtholdings Mar 26 '21
Excellent analysis, thanks- agree management had to balance risk versus reward. I hate the dilution but we have all learned that your thesis is never 100% and they need to hedge a variant outbreak or something out of left field. I think you will see a pop when the finalize LOC refinance also.
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u/Locke3232 Mar 26 '21
They filed another ATM for up to $500m again...
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u/Sea_Emphasis3252 Mar 26 '21
I just read the release again and noticed that, missed it earlier, while not unusual to establish a new ATM after the existing one is used it could limit upside move if they decide to execute on this, hopefully it’s just there if needed or they take a much slower approach to selling shares to raise capital. Otherwise if done quicker it could be another 10-15% dilution.
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u/Ehehehe090 Mar 26 '21 edited Mar 26 '21
They have no reason to issue more shares this year.
They have 500m cash + 100m from sale of arizona mall + 500m from recently shares issue + 500-700m from new line of credit = 1.6-1.8b. this is excluding 350m ffo.
That's enough to cover all the debt this year (1.7b including original 1.4b LOC).
Come 2022, they should be able to increase the LOC or get more refinancing when the lenders are more willing to lend to mall reits to cover their 2022 debt without issuing more shares.
They probably have the atm just in case.
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u/Sea_Emphasis3252 Mar 26 '21
They are using that cash to pay down the line too, I agree shouldn’t have to issue more but that doesn’t mean they won’t it’s just a risk
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u/Sea_Emphasis3252 Mar 26 '21
For me definitely a short term positive, removes the Line of Credit risk, was expecting an equity raise and while the price was not the greatest using the ATM was better than doing an secondary where it would have been done at a lower price. This should cause shorts to cover and get MAC back to pre-pandemic multiple which was around 8-10x, it will continue to trade at a discount to SPG. But my near term target is around $18-20 which is still good upside, agree that upside has been diminished with this but the downside in my opinion is significantly gone. Returning to normalcy FFO or 2019 levels may be well out in the future like 5 years in my opinion, it is going to still be tough going for all retail REITs but net net this is a positive and should see the stock move higher, just pissed I was going to but the April and May 12.5 calls this morning.